Self-Regulatory Organizations; NYSE Arca, Inc.; Order Disapproving a Proposed Rule Change To List and Trade the Shares of the ProShares Bitcoin ETF and the ProShares Short Bitcoin ETF, 43934-43942 [2018-18572]
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43934
Federal Register / Vol. 83, No. 167 / Tuesday, August 28, 2018 / Notices
Act 10 normally does not become
operative for 30 days after the date of its
filing. However, Rule 19b–4(f)(6)(iii) 11
permits the Commission to designate a
shorter time if such action is consistent
with the protection of investors and the
public interest. The Exchange has asked
the Commission to waive the 30-day
operative delay so that the proposed
rule change may become operative upon
filing. The Exchange states that waiver
of the 30-day operative delay would
allow the Buffer Funds to immediately
begin listing and trading on the
Exchange and employ its amended
investment strategy. The Commission
does not believe that any new or novel
issues are raised by the proposal.
Moreover, as noted above, apart from
modifying the downside protection from
10% to 9%, all other statements and
representations made in the Prior
Approval would remain true and will
apply on a continuous basis. For these
reasons, the Commission believes that
waiver of the 30-day operative delay is
consistent with the protection of
investors and the public interest.
Accordingly, the Commission hereby
waives the operative delay and
designates the proposed rule change
operative upon filing.12
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
Commission shall institute proceedings
to determine whether the proposed rule
change should be approved or
disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
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Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
CboeBZX–2018–064 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–CboeBZX–2018–064. This
file number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549 on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–CboeBZX–2018–064, and
should be submitted on or before
September 18, 2018.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.13
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018–18573 Filed 8–27–18; 8:45 am]
BILLING CODE 8011–01–P
10 17
CFR 240.19b–4(f)(6).
CFR 240.19b–4(f)(6)(iii).
12 For purposes only of waiving the 30-day
operative delay, the Commission also has
considered the proposed rule’s impact on
efficiency, competition, and capital formation. See
15 U.S.C. 78c(f).
11 17
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SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–83904; File No. SR–
NYSEArca–2017–139]
Self-Regulatory Organizations; NYSE
Arca, Inc.; Order Disapproving a
Proposed Rule Change To List and
Trade the Shares of the ProShares
Bitcoin ETF and the ProShares Short
Bitcoin ETF
August 22, 2018.
I. Introduction
On December 4, 2017, NYSE Arca,
Inc. (‘‘NYSE Arca’’ or ‘‘Exchange’’) filed
with the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Exchange
Act’’) 1 and Rule 19b–4 thereunder,2 a
proposed rule change to list and trade
the shares (‘‘Shares’’) of the ProShares
Bitcoin ETF and the ProShares Short
Bitcoin ETF (each a ‘‘Fund’’ and,
collectively, the ‘‘Funds’’) issued by the
ProShares Trust II (‘‘Trust’’) under
NYSE Arca Rule 8.200–E, Commentary
.02. The proposed rule change was
published for comment in the Federal
Register on December 26, 2017.3 The
comment period for the Notice of
Proposed Rule Change closed on
January 16, 2018.
On January 30, 2018, pursuant to
Section 19(b)(2) of the Exchange Act,4
the Commission designated a longer
period within which to approve the
proposed rule change, disapprove the
proposed rule change, or institute
proceedings to determine whether to
approve or disapprove the proposed
rule change.5 On March 23, 2018, the
Commission instituted proceedings
under Section 19(b)(2)(B) of the
Exchange Act 6 to determine whether to
approve or disapprove the proposed
rule change.7 The comment period and
rebuttal comment period for the Order
Instituting Proceedings closed on April
19, 2018, and May 3, 2018, respectively.
Finally, on June 15, 2018, the
Commission extended the period for
consideration of the proposed rule
change to August 23, 2018.8 As of
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Securities Exchange Act Release No. 82350
(Dec. 19, 2017), 82 FR 61100 (Dec. 26, 2017)
(‘‘Notice’’).
4 15 U.S.C. 78s(b)(2).
5 See Securities Exchange Act Release No. 82602
(Jan. 30, 2018), 83 FR 4941 (Feb. 2, 2018).
6 15 U.S.C. 78s(b)(2)(B).
7 See Securities Exchange Act Release No. 82939
(Mar. 23, 2018), 83 FR 13537 (Mar. 29, 2018)
(‘‘Order Instituting Proceedings’’).
8 See Securities Exchange Act Release No. 83452
(June 15, 2018), 83 FR 28894 (June 21, 2018).
2 17
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Federal Register / Vol. 83, No. 167 / Tuesday, August 28, 2018 / Notices
August 21, 2018, the Commission had
received 13 comments on the proposed
rule change.9
This order disapproves the proposed
rule change. Although the Commission
is disapproving this proposed rule
change, the Commission emphasizes
that its disapproval does not rest on an
evaluation of whether bitcoin, or
blockchain technology more generally,
has utility or value as an innovation or
an investment. Rather, the Commission
is disapproving this proposed rule
change because, as discussed below, the
Exchange has not met its burden under
the Exchange Act and the Commission’s
Rules of Practice to demonstrate that its
proposal is consistent with the
requirements of the Exchange Act
Section 6(b)(5), in particular the
requirement that a national securities
exchange’s rules be designed to prevent
fraudulent and manipulative acts and
practices.10 Among other things, the
Exchange has offered no record
evidence to demonstrate that bitcoin
futures markets are ‘‘markets of
significant size.’’ That failure is critical
because, as explained below, the
Exchange has failed to establish that
other means to prevent fraudulent and
manipulative acts and practices will be
sufficient, and therefore surveillancesharing with a regulated market of
significant size related to bitcoin is
necessary to satisfy the statutory
requirement that the Exchange’s rules be
designed to prevent fraudulent and
manipulative acts and practices.11
II. Description of the Proposal
The Exchange proposes to list and
trade the Shares under NYSE Arca Rule
8.200–E, Commentary .02, which
governs the listing and trading of Trust
Issued Receipts on the Exchange.12 Each
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9 See
Letters from Abe Kohen, AK Financial
Engineering Consultants, LLC (Dec. 27, 2017)
(‘‘Kohen Letter’’); Anita Desai (Apr. 6, 2018) (‘‘Desai
Letter’’); Ed Kaleda (Apr. 6, 2018) (‘‘Kaleda Letter’’);
Scott Moberg (Apr. 6, 2018) (‘‘Moberg Letter’’);
Adam Malkin (Apr. 8, 2018) (‘‘Malkin Letter’’);
Gisan Mohammed (Apr. 11, 2018) (‘‘Mohammed
Letter’’); Shravan Kumar (Apr. 11, 2018) (‘‘Kumar
Letter’’); Louise Fitzgerald (Apr. 19, 2018)
(‘‘Fitzgerald Letter’’); Joshua Rousseau (Apr. 30,
2018) (‘‘Rousseau Letter’’); Thomas W. Fink (May 3,
2018) (‘‘Fink Letter’’); Sharon Brown-Hruska,
Managing Director, and Trevor Wagener,
Consultant, NERA Economic Consulting (May 18,
2018) (‘‘NERA Letter’’); Sami Santos (Aug. 9, 2018)
(‘‘Santos Letter’’); and Sam M. Ahn (Aug. 16, 2018)
(‘‘Ahn Letter’’). All comments on the proposed rule
change are available on the Commission’s website
at: https://www.sec.gov/comments/sr-nysearca2017-139/nysearca2017139.htm.
10 See 15 U.S.C. 78f(b)(5).
11 See infra notes 29–31 and accompanying text.
12 See NYSE Arca Rule 8.200–E, Commentary .02.
NYSE Arca Rule 8.200–E permits the listing and
trading of ‘‘Trust Issued Receipts,’’ defined as a
security (1) that is issued by a trust which holds
specific securities deposited with the trust; (2) that,
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Fund will be a series of the Trust, and
the Trust and the Funds will be
managed and controlled by ProShare
Capital Management LLC (‘‘Sponsor’’).
Brown Brothers Harriman & Co. will be
the custodian and administrator for the
Trust. SEI Investments Distribution Co.
will serve as the distributor of the
Shares (‘‘Distributor’’). The Trust will
offer Shares of the Funds for sale
through the Distributor in ‘‘Creation
Units.’’ 13
According to the Notice, the
ProShares Bitcoin ETF’s investment
objective will be to seek results (before
fees and expenses) that, both for a single
day and over time, correspond to the
performance of lead-month bitcoin
futures contracts 14 listed and traded on
either the Cboe Futures Exchange
(‘‘CFE’’) or the Chicago Mercantile
Exchange (‘‘CME’’) (‘‘Benchmark
Futures Contract’’). This Fund generally
intends to invest substantially all of its
assets in the Benchmark Futures
Contracts, but may invest in other U.S.
exchange-listed bitcoin futures
contracts, if available (together with
Benchmark Futures Contracts,
collectively, ‘‘Bitcoin Futures
Contracts’’).15
According to the Notice, the
ProShares Short Bitcoin ETF’s
investment objective will be to seek
results, for a single day, that correspond
(before fees and expenses) to the inverse
of the daily performance of the
Benchmark Futures Contract. This Fund
generally intends to invest substantially
all of its assets through short positions
in Benchmark Futures Contracts, but
may invest through short positions in
Bitcoin Futures Contracts, if available.16
The Exchange represents that no more
than 10% of the net assets of a Fund in
the aggregate invested in Bitcoin
Futures Contracts shall consist of
Bitcoin Futures Contracts whose
principal market is neither a member of
the Intermarket Surveillance Group nor
a market with which the Exchange does
when aggregated in some specified minimum
number, may be surrendered to the trust by the
beneficial owner to receive the securities; and (3)
that pay beneficial owners dividends and other
distributions on the deposited securities, if any are
declared and paid to the trustee by an issuer of the
deposited securities. Commentary .02 applies to
Trust Issued Receipts that invest in any
combination of investments, including cash;
securities; options on securities and indices; futures
contracts; options on futures contracts; forward
contracts; equity caps, collars, and floors; and swap
agreements.
13 See Notice, supra note 3, 82 FR at 61101.
14 According to the Exchange, lead-month futures
contracts are the monthly contracts with the earliest
expiration date. See Notice, supra note 3, 82 FR at
61101, n.6.
15 See Notice, supra note 3, 82 FR at 61101.
16 See id.
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43935
not have a comprehensive surveillancesharing agreement.17 Further, according
to the Notice, in the event that position,
price, or accountability limits are
reached with respect to Bitcoin Futures
Contracts, each Fund may invest in
listed options on Bitcoin Futures
Contracts (should such listed options
become available) and OTC swap
agreements referencing Bitcoin Futures
Contracts (collectively, ‘‘Financial
Instruments’’).18 The Notice also states:
Bitcoin Futures Contracts are a new type of
futures contract to be traded on the CFE and
CME or other U.S. exchanges (if available).
Unlike the established futures markets for
traditional physical commodities, the market
for Bitcoin Futures Contracts is in the
development stage and has very limited
trading and operational history. As such, the
liquidity of the market for Bitcoin Futures
Contracts will depend on, among other
things, the supply and demand for Bitcoin
Futures Contracts, the adoption of bitcoin
and the commercial and speculative interest
in the market for Bitcoin Futures Contracts
and the potential ability to hedge against the
price of bitcoin with exchange-traded Bitcoin
Futures Contracts.19
The Exchange represents that trading
in the Shares of each Fund will be
subject to the existing trading
surveillances administered by the
Exchange, as well as cross-market
surveillances administered by FINRA on
behalf of the Exchange, which are
designed to detect violations of
Exchange rules and applicable federal
securities laws.20 The Exchange asserts
that these procedures are adequate to
properly monitor Exchange trading of
the Shares in all trading sessions and to
deter and detect violations of Exchange
rules and federal securities laws
applicable to trading on the Exchange.21
III. Discussion
A. The Applicable Standard for Review
The Commission must consider
whether the Exchange’s proposal is
consistent with Exchange Act Section
6(b)(5), which requires, in relevant part,
that the rules of a national securities
exchange be designed ‘‘to prevent
fraudulent and manipulative acts and
practices’’ and ‘‘to protect investors and
the public interest.’’ 22 Under the
Commission’s Rules of Practice, the
‘‘burden to demonstrate that a proposed
rule change is consistent with the
Exchange Act and the rules and
regulations issued thereunder . . . is on
17 See
id. at 61105.
id. at 61102.
19 Id. at 61103.
20 See id. at 61105.
21 See id.
22 15 U.S.C. 78f(b)(5).
18 See
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Federal Register / Vol. 83, No. 167 / Tuesday, August 28, 2018 / Notices
the self-regulatory organization [‘SRO’]
that proposed the rule change.’’ 23
The description of a proposed rule
change, its purpose and operation, its
effect, and a legal analysis of its
consistency with applicable
requirements must all be sufficiently
detailed and specific to support an
affirmative Commission finding,24 and
any failure of an SRO to provide this
information may result in the
Commission not having a sufficient
basis to make an affirmative finding that
a proposed rule change is consistent
with the Exchange Act and the
applicable rules and regulations.25
Moreover, ‘‘unquestioning reliance’’ on
an SRO’s representations in a proposed
rule change is not sufficient to justify
Commission approval of a proposed rule
change.26
B. Preventing Fraudulent and
Manipulative Practices
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1. Applicable Legal Standard
To approve the Exchange’s proposal
to list the Shares, the Commission must
be able to find that the proposal is,
consistent with Exchange Act Section
6(b)(5), ‘‘designed to prevent fraudulent
and manipulative acts and practices.’’ 27
As the Commission recently explained
in an order disapproving a listing
proposal for the Winklevoss Bitcoin
Trust (‘‘Winklevoss Order’’), although
surveillance-sharing agreements are not
the exclusive means by which an
exchange-traded product (‘‘ETP’’) listing
exchange can meet its obligations under
Exchange Act Section 6(b)(5), such
agreements are a widely used means for
exchanges that list ETPs to meet their
obligations, and the Commission has
historically recognized their
importance.28
The Commission has therefore
determined that, if the listing exchange
for an ETP fails to establish that other
means to prevent fraudulent and
manipulative acts and practices will be
sufficient, the listing exchange must
enter into a surveillance-sharing
agreement with a regulated market of
significant size because ‘‘[s]uch
agreements provide a necessary
23 Rule 700(b)(3), Commission Rules of Practice,
17 CFR 201.700(b)(3).
24 See id.
25 See id.
26 See Susquehanna Int’l Group, LLP v. Securities
and Exchange Commission, 866 F.3d 442, 447 (D.C.
Cir. 2017).
27 15 U.S.C. 78f(b)(5).
28 Order Setting Aside Action by Delegated
Authority and Disapproving a Proposed Rule
Change, as Modified by Amendments No. 1 and 2,
To List and Trade Shares of the Winklevoss Bitcoin
Trust, Securities Exchange Act Release No. 83723
(July 26, 2018), 83 FR 37579, 37580 (Aug. 1, 2018)
(SR–BatsBZX–2016–30).
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deterrent to manipulation because they
facilitate the availability of information
needed to fully investigate a
manipulation if it were to occur.’’ 29
Accordingly, a surveillance-sharing
agreement with a regulated market of
significant size is required to ensure
that, in compliance with the Exchange
Act, the proposal is ‘‘designed to
prevent fraudulent and manipulative
acts and practices.’’ 30 In this context,
the Commission has interpreted the
terms ‘‘significant market’’ and ‘‘market
of significant size’’ to include a market
(or group of markets) as to which (a)
there is a reasonable likelihood that a
person attempting to manipulate the
ETP would also have to trade on that
market to successfully manipulate the
ETP, so that a surveillance-sharing
agreement would assist the ETP listing
market in detecting and deterring
misconduct, and (b) it is unlikely that
trading in the ETP would be the
predominant influence on prices in that
market.31 Thus, a surveillance-sharing
agreement must be entered into with a
‘‘significant market’’ to assist in
detecting and deterring manipulation of
the ETP, because someone attempting to
manipulate the ETP is reasonably likely
to also engage in trading activity on that
‘‘significant market.’’
Although the Winklevoss Order
applied these standards to a commoditytrust ETP based on bitcoin, the
Commission believes that these
standards are also appropriate for an
ETP based on bitcoin futures. When
approving the first commodity-futures
ETP, the Commission specifically noted
that ‘‘[i]nformation sharing agreements
with primary markets trading index
components underlying a derivative
product are an important part of a selfregulatory organization’s ability to
monitor for trading abuses in derivative
products.’’ 32 And the Commission’s
approval orders for commodity-futures
ETPs consistently note the ability of an
29 Id. (citing Amendment to Rule Filing
Requirements for Self-Regulatory Organizations
Regarding New Derivative Securities Products,
Securities Exchange Act Release No. 40761 (Dec. 8,
1998) 63 FR 70952, 70954, 70959 (Dec. 22, 1998)
(File No. S7–13–98)).
30 15 U.S.C. 78f(b)(5).
31 See Winklevoss Order, supra note 28, 83 FR at
37594. This definition is illustrative and not
exclusive. There could be other types of ‘‘significant
markets’’ and ‘‘markets of significant size,’’ but this
definition is an example that will provide guidance
to market participants. See id.
32 Securities Exchange Act Release No. 53105
(Jan. 11, 2006), 71 FR 3129, 3136 (Jan. 19, 2006)
(SR–Amex–2005–059). Additionally, the
Winklevoss Order discusses the broader history and
importance of surveillance-sharing agreements
relating to derivative securities products, quoting
Commission statements dating from 1990 on. See
Winklevoss Order, supra note 28, 83 FR at 37592–
94.
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ETP listing exchange to share
surveillance information either through
surveillance-sharing agreements or
through membership by the listing
exchange and the relevant futures
exchanges in the Intermarket
Surveillance Group.33 While the
33 See, e.g., Securities Exchange Act Release No.
53105 (Jan. 11, 2006), 71 FR 3129, 3136 (Jan. 19,
2006) (SR–Amex–2005–059) (approval order noted
that Amex’s ‘‘Information Sharing Agreement with
the NYMEX and the CBOT and [Amex’s]
Memorandum of Understanding with the LME,
along with the Exchange’s participation in the ISG,
in which the CBOT participates . . . create the
basis for the Amex to monitor for fraudulent and
manipulative practices in the trading of the
Shares’’); Securities Exchange Act Release No.
53582 (Mar. 31, 2006), 71 FR 17510, 17518 (Apr.
6, 2006) (SR–Amex–2005–127) (approval order
noted that Amex’s ‘‘comprehensive surveillance
sharing agreements with the NYMEX and ICE
Futures . . . create the basis for the Amex to
monitor for fraudulent and manipulative practices
in the trading of the Units’’ and that ‘‘[s]hould the
USOF invest in oil derivatives traded on markets
such as the Singapore Oil Market, the Exchange
represents that it will file a proposed rule change
pursuant to Section 19(b) of the [Exchange] Act,
seeking Commission approval of [Amex’s]
surveillance agreement with such market’’);
Securities Exchange Act Release No. 54013 (June
16, 2006), 71 FR 36372, 36378–79 (June 26, 2006)
(NYSE–2006–17) (approval order noted that NYSE’s
‘‘comprehensive surveillance sharing agreements
with the NYMEX, the Kansas City Board of Trade,
ICE Futures, and the LME . . . create the basis for
the NYSE to monitor for fraudulent and
manipulative trading practices’’ and that ‘‘all of the
other trading venues on which current Index
components and CERFs are traded are members of
the ISG’’); Securities Exchange Act Release No.
54450 (Sept. 14, 2006), 71 FR 55230, 55236 (Sept.
21, 2006) (SR–Amex–2006–44) (approval order
noted that ‘‘CME, where the futures contract for
each of the current Index components is traded, is
a member of the ISG’’ and that in the event of new
fund investments in ‘‘foreign currency futures
contracts traded on futures exchanges other than
CME, [Amex] must have a CSSA with that futures
exchange or the futures exchange must be an ISG
member’’); Securities Exchange Act Release No.
55029 (Dec. 29, 2006), 72 FR 806, 809–10 (Jan. 8,
2007) (SR–Amex–2006–76) (approval order noted
that Amex’s ‘‘Comprehensive Surveillance Sharing
Agreement with the ICE Futures, LME, and
NYMEX, . . . and membership in the Intermarket
Surveillance Group (‘ISG’) creates the basis for the
Amex to monitor fraudulent and manipulative
practices in the trading of the Shares’’); Securities
Exchange Act Release No. 56880 (Dec. 3, 2007), 72
FR 69259, 69261 (Dec. 7, 2007) (SR–Amex–2006–
96) (approval order noted that Amex has
‘‘information sharing agreements with the
InterContinental Exchange, the Chicago Mercantile
Exchange, and the New York Mercantile Exchange
and may obtain market surveillance information
from other exchanges, including the Chicago Board
of Trade, London Metals Exchange, and the New
York Board of Trade through the Intermarket
Surveillance Group’’); Securities Exchange Act
Release No. 55632 (Apr. 13, 2007), 72 FR 19987,
19988 (Apr. 20, 2007) (SR–Amex–2006–112)
(approval order noted that Amex ‘‘currently has in
place an Information Sharing Agreement with the
NYMEX and ICE Futures’’ and that if ‘‘USNG
invests in Natural Gas Interests traded on other
exchanges, the Amex represented that it will seek
to enter into Information Sharing arrangements with
those particular exchanges’’); Securities Exchange
Act Release No. 57456 (Mar. 7, 2008), 73 FR 13599,
13601 (Mar. 13, 2008) (NYSEArca–2007–91)
(approval order noted that NYSEArca ‘‘can obtain
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Commission in those orders did not
explicitly undertake an analysis of
whether the related futures markets
were of ‘‘significant size,’’ the exchanges
market surveillance information, including
customer identity information, with respect to
transactions occurring on the NYM, the Kansas City
Board of Trade, ICE, and the LME, pursuant to its
comprehensive information sharing agreements
with each of those exchanges’’ and that ‘‘[a]ll of the
other trading venues on which current Index
components are traded are members of the ISG’’);
Securities Exchange Act Release No. 57838 (May
20, 2008), 73 FR 30649, 30652, (May 28, 2008) (SR–
NYSEArca–2008–09) (approval order noted that
NYSEArca ‘‘may obtain information via the ISG
from other exchanges who are members or affiliate
members of the ISG,’’ that NYSEArca ‘‘has an
information sharing agreement in place with ICE
Futures,’’ and that NYSEArca will file a proposed
rule change ‘‘if the Fund invests in EUAs . . . that
constitute more than 10% of the weight of the Fund
where the principal trading market for such
component is not a member or affiliate member of
the ISG or where the Exchange does not have a
comprehensive surveillance sharing agreement with
such market’’); Securities Exchange Act Release No.
63635 (Jan. 3, 2011), 76 FR 1489, 1491 (Jan. 10,
2011) (NYSEArca–2010–103) (approval order noted
that ‘‘with respect to Fund components traded on
exchanges, not more than 10% of the weight of such
components in the aggregate will consist of
components whose principal trading market is not
a member of the Intermarket Surveillance Group or
is a market with which [NYSEArca] does not have
a comprehensive surveillance sharing agreement’’);
Securities Exchange Act Release No. 66553 (Mar. 9,
2012), 77 FR 15440, 15444 (Mar. 15, 2012) (SR–
NYSEArca–2012–04) (approval order noted that
NYSEArca ‘‘can obtain market surveillance
information, including customer identity
information, from ICE [Futures] and CME, which
are members of the Intermarket Surveillance
Group’’); Securities Exchange Act Release No.
67223 (June 20, 2012), 77 FR 38117, 38124 (June 26,
2012) (NYSEAmex–2012–24) (approval order noted
that NYSEAmex ‘‘can obtain market surveillance
information, including customer identity
information, with respect to transactions occurring
on exchanges that are members of ISG, including
CME, CBOT, COMEX, NYMEX . . . and ICE
Futures US,’’ that NYSEAmex ‘‘currently has in
place a comprehensive surveillance sharing
agreement with each of CME, NYMEX, ICE Futures
Europe, and KCBOT,’’ and that ‘‘while the Fund
may invest in futures contracts or options on
futures contracts which trade on markets that are
not members of ISG or with which [NYSEAmex]
does not have in place a comprehensive
surveillance sharing agreement, such instruments
will never represent more than 10% of the Fund’s
holdings’’); Securities Exchange Act Release No.
73561 (Nov. 7, 2014), 79 FR 68329, 68330 (Nov. 14,
2014) (NYSEArca–2014–102) (approval order noted
that ‘‘FINRA may obtain trading information
regarding trading in the Shares and Coal Futures
from such markets and other entities that are
members of ISG or with which [NYSEArca] has in
place a comprehensive surveillance sharing
agreement’’ and that ‘‘CME is a member of the
ISG’’); Securities Exchange Act Release No. 82390
(Dec. 22, 2017), 82 FR 61625, 61631, 61634 (Dec.
28, 2017) (NYSEArca–2017–107) (approval order
noted that NYSEArca ‘‘may obtain information
regarding trading in the Shares and Freight Futures
from markets and other entities that are members
of ISG or with which [NYSEArca] has in place a
CSSA’’ and that ‘‘not more than 10% of the net
assets of the Fund in the aggregate invested in
Freight Futures or options on Freight Futures shall
consist of derivatives whose principal market is not
a member of the ISG or is a market with which
[NYSEArca] does not have a CSSA’’).
proposing commodity-futures ETPs on a
single reference asset or benchmark
generally made representations
regarding the trading volume of the
underlying futures markets,34 and the
34 See, e.g., Securities Exchange Act Release No.
62213 (June 3, 2010), 75 FR 32828 (June 9, 2010)
(SR–NYSEArca–2010–22) (notice of proposed rule
change included NYSE Arca’s representations that:
(i) Corn futures volume on Chicago Board of Trade
(‘‘CBOT’’) for 2008 and 2009 (through November 30,
2009) was 59,934,739 contracts and 47,754,866
contracts, respectively, and as of March 16, 2010,
CBOT open interest for corn futures was 1,118,103
contracts, and open interest for near month futures
was 447,554 contracts; (ii) the corn futures contract
price was $18,337.50 ($3.6675 per bushel and 5,000
bushels per contract), and the approximate value of
all outstanding contracts was $20.5 billion; (iii) as
of March 16, 2010, open interest in corn swaps
cleared on CBOT was approximately 2,100
contracts, with an approximate value of $38.5
million; and (iv) the position limits for all months
is 22,000 corn contracts, and the total value of
contracts if position limits were reached would be
approximately $403.5 million (based on the
$18,337.50 contract price), Securities Exchange Act
Release No. 61954 (Apr. 21, 2010), 75 FR 22663,
22664 n.10 (Apr. 29, 2010)); Securities Exchange
Act Release No. 63610 (Dec. 27, 2010), 76 FR 199
(Jan. 3, 2011) (SR–NYSEArca–2010–101) (notice of
proposed rule change included NYSE Arca’s
representations that: (i) As of June 14, 2010, there
was VIX futures contracts open interest on CFE of
88,366 contracts, with a contract price of $25.55
and value of open interest of $2,257,751,300; (ii)
total CFE trading volume in 2009 in VIX futures
contracts was 1,143,612 contracts, with average
daily volume of 4,538 contracts; and (iii) total
volume year-to-date (through May 31, 2010) was
1,399,709 contracts, with average daily volume of
13,458 contracts, Securities Exchange Act Release
No. 63317 (Nov. 16, 2010), 75 FR 71158, 71159 n.9
(Nov. 22, 2010)); Securities Exchange Act Release
No. 63753 (Jan. 21, 2011), 76 FR 4963 (Jan. 27,
2011) (SR–NYSEArca–2010–110) (notice of
proposed rule change included NYSE Arca’s
representations that: (i) Natural gas futures volume
on New York Mercantile Exchange (‘‘NYMEX’’) for
2009 and 2010 (through October 29, 2010) was
47,864,639 contracts and 52,490,180 contracts,
respectively; (ii) as of October 29, 2010, NYMEX
open interest for natural gas futures was 794,741
contracts, and open interest for near month futures
was 47,313 contracts; (iii) the contract price was
$40,380 ($4.038 per MMBtu and 10,000 MMBtu per
contract), and the approximate value of all
outstanding contracts was $32.1 billion; (iv) the
position limits for all months is 12,000 natural gas
contracts and the total value of contracts if position
limits were reached would be approximately
$484.56 million (based on the $40,380 contract
price); and (v) as of October 29, 2010, open interest
in natural gas swaps cleared on NYMEX was
approximately 2,618,092 contracts, with an
approximate value of $26.4 billion ($4.038 per
MMBtu and 2,500 MMBtu per contract), Securities
Exchange Act Release No. 63493 (Dec. 9, 2010), 75
FR 78290, 78291 n.11 (Dec. 15, 2010)); Securities
Exchange Act Release No. 63869 (Feb. 8, 2011), 76
FR 8799 (Feb. 15, 2011) (SR–NYSEArca–2010–119)
(notice of proposed rule change included NYSE
Arca’s representations that: (i) WTI crude oil futures
volume on NYMEX for 2009 and 2010 (through
November 30, 2010) was 137,352,118 contracts and
156,155,620 contracts, respectively; (ii) as of
November 30, 2010, NYMEX open interest for WTI
crude oil was 1,342,325 contracts, and open interest
for near month futures was 323,184 contracts; (iii)
the position limits for all months is 20,000 WTI
crude oil contracts and the total value of contracts
if position limits were reached would be
approximately $1.68 billion (based on the $84.11
43937
contract price); and (iv) the contract price was
$84,110 ($84.11 USD per barrel and 1,000 barrels
per contract), and the approximate value of all
outstanding contracts was $112.9 billion, Securities
Exchange Act Release No. 63625 (Dec. 30, 2010), 76
FR 807, 808 n.11 (Jan. 6, 2011)); Securities
Exchange Act Release No. 65134 (Aug. 15, 2011),
76 FR 52034 (Aug. 19, 2011) (SR–NYSEArca–2011–
23) (notice of proposed rule change included NYSE
Arca’s representations that: (i) As of January 31,
2011, there was VIX futures contracts open interest
on CFE of 163,396 contracts with a value of open
interest of $3,461,984,900; (ii) total CFE trading
volume in 2010 in VIX futures contracts was
4,402,616 contracts, with average daily volume of
17,741 contracts; and (iii) total volume year-to-date
(through January 31, 2011) was 779,493 contracts,
with average daily volume of 38,975 contracts,
Securities Exchange Act Release No. 64470 (May
11, 2011), 76 FR 28493, 28494 n.12 (May 17, 2011));
Securities Exchange Act Release No. 65136 (Aug.
15, 2011), 76 FR 52037 (Aug. 19, 2011) (SR–
NYSEArca–2011–24) (notice of proposed rule
change included NYSE Arca’s representations that:
(i) Natural gas futures volume on NYMEX for 2009
and 2010 (through December 31, 2010) was
47,864,639 contracts and 64,350,673 contracts,
respectively; (ii) as of December 31, 2010, NYMEX
open interest for all natural gas futures was 772,104
contracts, and the approximate value of all
outstanding contracts was $35,664,257,310 billion
[sic]; (iii) open interest as of December 31, 2010 for
the near month contract was 166,757 contracts and
the near month contract value was $7,345,645,850
($4.405 per MMBtu and 10,000 MMBtu per
contract); (iv) the position accountability limits for
all months is 12,000 natural gas contracts and the
total value of contracts if position accountability
limits were reached would be approximately
$528,600,000 million (based on the $4.405 contract
price); and (v) as of December 31, 2010, open
interest in natural gas swaps cleared on NYMEX
was approximately 1,493,013 contracts, with an
approximate value of $16,463,384,003 ($4.411 per
MMBtu and 2,500 MMBtu per contract), Securities
Exchange Act Release No. 64464 (May 11, 2011), 76
FR 28483, 28484 n.11 (May 17, 2011)); Securities
Exchange Act Release No. 65344 (Sept. 15, 2011),
76 FR 58549 (Sept. 21, 2011) (SR–NYSEArca–2011–
48) (notice of proposed rule change included NYSE
Arca’s representations that: (i) Wheat futures
volume on CBOT for 2010 and 2011 (through April
29, 2011) was 23,058,783 contracts and 8,860,135
contracts, respectively; (ii) as of April 29, 2011,
open interest for wheat futures was 456,851
contracts; (iii) the wheat contract price was
$40,062.50 (801.25 cents per bushel and 5,000
bushels per contract), and the approximate value of
all outstanding contracts was $18.3 billion; (iv) the
position limits for all months was 6,500 wheat
contracts and the total value of contracts if position
limits were reached would be approximately $260.4
million (based on the $40,062.50 contract price); (v)
soybean futures volume on CBOT for 2010 and 2011
(through April 29, 2011) was 36,962,868 contracts
and 16,197,385 contracts, respectively; (vi) as of
April 29, 2011, open interest for soybean futures
was 572,959 contracts; (vii) the soybean contract
price was $69,700.00 (1394 cents per bushel and
5,000 bushels per contract), and the approximate
value of all outstanding contracts was $39.9 billion;
(viii) the position limits for all months is 6,500
soybean contracts and the total value of contracts
if position limits were reached would be
approximately $453 million (based on the
$69,700.00 contract price); (ix) sugar futures volume
on ICE Futures for 2010 and 2011 (through April
29, 2011) was 27,848,391 contracts and 9,045,069
contracts, respectively; (x) as of April 29, 2011,
open interest for sugar futures was 570,948
contracts; (xi) the sugar contract price was
$24,920.00 (22.25 cents per pound and 112,000
pounds per contract), and the approximate value of
Continued
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all outstanding contracts was $14.2 billion; and (xii)
the position limits for all months is 15,000 sugar
contracts and the total value of contracts if position
limits were reached would be approximately $373.8
million (based on the $24,920.00 contract price),
Securities Exchange Act Release No. 64967 (July 26,
2011), 76 FR 45885, 45886 n.10, 45888 n.20, 45890
n.24 (Aug. 1, 2011)); Securities Exchange Act
Release No. 66553 (Mar. 9, 2012), 77 FR 15440
(Mar. 15, 2012) (SR–NYSEArca–2012–04) (notice of
proposed rule change included NYSE Arca’s
representations that: (i) As of December 30, 2011,
open interest in AUD/USD futures contracts traded
on CME was $11.56 billion, and AUD/USD futures
contracts had an average daily trading volume in
2011 of 123,006 contracts; (ii) as of December 30,
2011, open interest in CAD/USD futures contracts
traded on CME was $11.66 billion, and CAD/USD
futures contracts had an average daily trading
volume in 2011 of 89,667 contracts; (iii) as of
December 30, 2011, open interest in CHF/USD
futures contracts traded on CME was $4.99 billion,
and CHF/USD futures contracts had an average
daily trading volume in 2011 of 40,955 contracts;
(iv) futures contracts based on the U.S. Dollar Index
(‘‘USDX’’) were listed on November 20, 1985, and
options on the USDX futures contracts began
trading on September 3, 1986; (v) as of December
30, 2011, open interest in USDX futures contracts
traded on ICE Futures was $5.44 billion, and USDX
futures contracts had an average daily trading
volume in 2011 of 30,341 contracts; (vi) as of
December 30, 2011, open interest in EUR/USD
futures contracts traded on CME was $46.12 billion,
and EUR/USD futures contracts had an average
daily trading volume in 2011 of 336,947 contracts;
and (vii) as of December 30, 2011, open interest in
JPY/USD futures contracts traded on CME was
$25.75 billion, and JPY/USD futures contracts had
an average daily trading volume in 2011 of 113,476
contracts, Securities Exchange Act Release No.
66180 (Jan. 18, 2012), 77 FR 3532, 3534–35 (Jan. 24,
2012)); Securities Exchange Act Release No. 68165
(Nov. 6, 2012), 77 FR 67707 (Nov. 13, 2012) (SR–
NYSEArca–2012–102) (notice of proposed rule
change included NYSE Arca’s representations that:
(i) Gold and silver futures contracts traded on
Commodity Exchange, Inc. (‘‘COMEX’’) are the
global benchmark contracts and most liquid futures
contracts in the world for each respective
commodity; (ii) as of March 15, 2012, open interest
in gold futures contracts and silver futures contracts
traded on CME was $23.7 billion and $8.5 billion,
respectively; (iii) gold futures contracts and silver
futures contracts had an average daily trading
volume in 2011 of 138,964 contracts and 63,913
contracts, respectively; (iv) CME constitutes the
largest regulated foreign exchange marketplace in
the world, with over $100 billion in daily liquidity;
(v) as of March 15, 2012, open interest in Euro
futures contracts and Yen futures contracts traded
on CME and, for Dollar futures contracts, on ICE
Futures, were $42.7 billion, $20.8 billion, and $4.8
billion, respectively; and (vi) Euro futures contracts,
Yen futures contracts, and Dollar futures contracts
had an average daily trading volume in 2011 of
325,103, 106,824, and 27,258 contracts,
respectively, Securities Exchange Act Release No.
67882 (Sept. 18, 2012), 77 FR 58881, 58883 n.10,
58883 n.14 (Sept. 24, 2012)); Securities Exchange
Act Release No. 81686 (Sept. 22, 2017), 82 FR
45643, 45646 (Sept. 29, 2017) (SR–NYSEArca–
2017–05) (order approving the listing and trading of
the Direxion Daily Crude Oil Bull 3x Shares and
Direxion Daily Crude Oil Bear 3x Shares, citing to
NYSE Arca’s representations that: (i) The oil
contract market was of significant size and
liquidity, and had average daily volume of 650,000
contracts and daily open interest of 450,000
contracts; (ii) the Sponsor is registered as a
commodity pool operator with the CFTC and is a
member of the National Futures Association, and
(iii) the CFTC has regulatory jurisdiction over the
trading of futures contracts traded on U.S. markets);
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Commission was in each of those cases
dealing with a large futures market that
had been trading for a number of years
before an exchange proposed an ETP
based on those futures.35 And where the
Securities Exchange Act Release No. 82390 (Dec.
22, 2017), 82 FR 61625 (Dec. 28, 2017) (SR–
NYSEArca–2017–107) (notice of proposed rule
change included NYSE Arca’s representations that:
(i) Freight futures liquidity has remained relatively
constant, in lot terms, over the last five years with
approximately 1.1 million lots trading annually; (ii)
open interest currently stood at approximately
290,000 lots across all asset classes representing an
estimated value of more than $3 billion, and, of
such open interest, Capesize contracts accounted
for approximately 50%, Panamax for approximately
40%, and Handymax for approximately 10%,
Securities Exchange Act Release No. 81681 (Sept.
22, 2017), 82 FR 45342, 45345 (Sept. 28, 2017)). See
also Securities Exchange Act Release No. 53582
(Mar. 31, 2006), 71 FR 17510 (Apr. 6, 2006) (SR–
Amex–2005–127) (notice of proposed rule change
included Amex’s representations that: (i) WTI light,
sweet crude oil contract, listed and traded at
NYMEX, trades in units of 42,000 gallons (1,000
barrels), and annual daily contract volume on
NYMEX from 2001 through October 2005 was
149,028, 182,718, 181,748, 212,382 and 242,262,
respectively; (ii) annual daily contract volume on
ICE Futures for Brent crude contracts from 2001
through October 2005 was 74,011, 86,499, 96,767,
102,361 and 120,695 respectively; (iii) annual daily
contract volume on NYMEX for heating oil futures
from 2001 through October 2005 was 41,710,
42,781, 46,327, 51,745 and 52,334, respectively; (iv)
annual daily contract volume on NYMEX for
natural gas contracts from 2001 through October
2005 was 47,457, 97,431, 76,148, 70,048 and
77,149, respectively; and (v) annual daily contract
volume on NYMEX for gasoline contracts from 2001
through October 2005 was 38,033, 43,919, 44,688,
51,315 and 53,577, respectively, Securities
Exchange Act Release No. 53324 (Feb. 16, 2006), 71
FR 9614, 9618 (Feb. 24, 2006)); Securities Exchange
Act Release No. 55632 (Apr. 13, 2007), 72 FR 19987
(Apr. 20, 2007) (SR–Amex–2006–112) (notice of
proposed rule change included Amex’s
representations that annual daily contract volume
on NYMEX for natural gas contracts from 2001
through October 2006 was 47,457, 97,431, 76,148,
70,048, 76,265, and 102,097, respectively,
Securities Exchange Act Release No. 55372 (Feb. 28,
2007), 72 FR 10267, 10268 (Mar. 7, 2007)).
35 For example, corn futures began trading in
1877, see https://www.cmegroup.com/media-room/
historical-first-trade-dates.html, and the first ETP
based on corn futures was approved for listing and
trading in 2010. See Securities Exchange Act
Release No. 62213 (June 3, 2010), 75 FR 32828 (June
9, 2010) (SR–NYSEArca–2010–22). VIX futures
began trading in 2004, see https://cfe.cboe.com/cfeproducts/vx-cboe-volatility-index-vix-futures/
contract-specifications, and the first ETPs based on
VIX futures were approved for listing and trading
in 2010. See Securities Exchange Act Release No.
63610 (Dec. 27, 2010), 76 FR 199 (Jan. 3, 2011) (SR–
NYSEArca–2010–10). Natural gas futures began
trading in 1990, see https://www.cmegroup.com/
media-room/historical-first-trade-dates.html, and
the first ETP based on natural gas was approved for
listing and trading in 2007. See Securities Exchange
Act Release No. 55632 (Apr. 13, 2007), 72 FR 19987
(Apr. 20, 2007) (SR–Amex–2006–112). Crude oil
futures began trading in 1983, see https://
www.cmegroup.com/media-room/historical-firsttrade-dates.html, and the first ETP based on crude
oil futures was approved for listing and trading in
2006. See Securities Exchange Act Release No.
53582 (Mar. 31, 2006), 71 FR 17510 (Apr. 6, 2006)
(SR–Amex–2005–127). Wheat futures, sugar futures,
and soybean futures began trading in 1877, 1914,
and 1936, respectively, see https://
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Commission has considered a proposed
ETP based on futures that had only
recently begun trading,36 the
Commission specifically addressed
whether the futures on which the ETP
was based—which were futures on an
index of well-established commodity
futures—were illiquid or susceptible to
manipulation.37
Accordingly, the Commission
examines below whether the
www.cmegroup.com/media-room/historical-firsttrade-dates.html and https://www.theice.com/
publicdocs/ICE_Sugar_Brochure.pdf, and the first
ETPs based on each of these commodity futures
were approved for listing and trading in 2011. See
Securities Exchange Act Release No. 65344 (Sept.
15, 2011), 76 FR 58549 (Sept. 21, 2011) (SR–
NYSEArca–2011–48). U.S. Dollar Index futures
began trading in 1985, https://www.theice.com/
publicdocs/futures_us/ICE_Dollar_Index_FAQ.pdf,
and the first ETPs based on U.S. Dollar Index
futures was approved for listing and trading in
2007. See Securities Exchange Act Release No.
55292 (Feb. 14, 2007), 72 FR 8406 (Feb. 26, 2007)
(SR–Amex–2006–86). Australian Dollar futures and
Euro futures began trading in 1987 and 1999,
respectively, and Canadian Dollar futures, Swiss
Franc futures, and Yen futures began trading in
2002, see https://www.cmegroup.com/media-room/
historical-first-trade-dates.html, and the first ETPs
based on each of these individual currency futures
were approved for listing and trading in 2012. See
Securities Exchange Act Release No. 66553 (Mar. 9,
2012), 77 FR 15440 (Mar. 15, 2012) (SR–NYSEArca–
2012–04). Silver futures and gold futures began
trading in 1933 and 1974, respectively, see https://
www.cmegroup.com/media-room/historical-firsttrade-dates.html, and the first ETPs based on each
of these commodity futures were approved for
listing and trading in 2006. See Securities Exchange
Act Release No. 55029 (Dec. 29, 2006), 72 FR 806
(Jan. 8, 2007) (SR–Amex–2006–76). Freight futures
have been cleared since 2005, and the first ETP
based on freight futures was approved for listing
and trading in 2017. See Securities Exchange Act
Release No. 82390 (Dec. 22, 2017), 82 FR 61625,
61626 n.6 (Dec. 28, 2017) (SR–NYSEArca–2017–
107) (noting that ‘‘Freight Futures have been cleared
since 2005’’).
36 The Exchange filed its proposal before bitcoin
futures began trading on either CME or CFE.
37 At issue were futures on an index comprising
futures on crude oil, Brent crude oil, natural gas,
heating oil, gasoline, gas oil, live cattle, wheat,
aluminum, corn, copper, soybeans, lean hogs, gold,
sugar, cotton, red wheat, coffee, standard lead,
feeder cattle, zinc, primary nickel, cocoa, and silver.
See Securities Exchange Act Release No. 53659
(Apr. 17, 2006), 71 FR 21074, 21080 (Apr. 24, 2006)
(SR–NYSE–2006–17) (notice of proposed rule
change to list shares of iShares GSCI CommodityIndexed Trust). The Commission concluded that
requirements of Exchange Act Section 6(b)(5) had
been met because concerns about manipulation
would be addressed by the arbitrage relationship
between the new index futures and the existing
component futures, as well as the ETP listing
exchange’s comprehensive surveillance-sharing
agreements not only with the market for the index
futures, but also with the markets for the
component futures. See Securities Exchange Act
Release No. 54013 (June 16, 2006), 71 FR 36372,
36379 (June 26, 2006) (SR–NYSE–2006–17) (order
approving listing of shares of iShares GSCI
Commodity-Indexed Trust). Additionally, the
approval order for the ETP noted that, if the volume
in any futures contract that was part of the reference
index fell below a specified multiple of production
of the underlying commodity, that contract’s weight
in the index would decrease. See id. at 36374.
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representations by the Exchange, and
the comments received from the public,
support a finding that the Exchange has
entered into a surveillance-sharing
agreement with a market of significant
size relating to bitcoin, the asset
underlying the proposed ETPs, or that
alternative means of preventing fraud
and manipulation would be sufficient to
satisfy the requirement of Exchange Act
Section 6(b)(5) that the proposed rule
change be designed to prevent
fraudulent and manipulative acts and
practices.
2. Comments Received
One commenter states that
commencing an ETP without allowing
the market to adjust to the cash-settled
futures products would be akin to
‘‘putting the cart before the horse’’ and
seems to be an attempt to appease
institutional investors.38
One commenter states that the market
for bitcoin derivatives other than bitcoin
exchange-traded futures appears to be
developing and that financial
institutions are reportedly moving
toward launching bitcoin-related trading
desks and other operations. This
commenter believes that the proposed
offering of both long and short ETPs
raises the possibility that market makers
in bitcoin-related derivatives could
make two-sided markets if interest in
the long and short ETPs is similar in
magnitude. The commenter further
believes that interest outside of the
bitcoin ETPs may be sufficient to
motivate market makers to maintain
bitcoin derivatives desks.39 In addition,
the commenter suggests that questions
about bitcoin derivatives markets can be
addressed through market depth
analyses, discussions with potential
bitcoin derivatives liquidity providers,
and analyses of order and trade data
across CME and CFE to determine the
plausibility of simultaneous liquidity
collapses on both bitcoin future
markets.40
Three commenters assert that there is
manipulation in the bitcoin market.41
One commenter states that it is common
knowledge that the bitcoin market is
being manipulated and asserts that
BitConnect, which was recently shut
down and had promised risk-free
annual returns of up to 120%, is an
example of Ponzi and multi-level
marketing schemes that are too
common. This commenter argues that
38 See
39 See
Desai Letter, supra note 9, at 1.
NERA Letter, supra note 9,
42 See
id. at 2.
Desai Letter, supra note 9, at 1; Fitzgerald
Letter, supra note 9, at 1; Kumar Letter, supra note
9.
41 See
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Kumar Letter, supra note 9.
Malkin Letter, supra note 9, at 1–2.
44 See Fitzgerald Letter, supra note 9, at 1–2.
45 See Rousseau Letter, supra note 9.
46 See Fitzgerald Letter, supra note 9, at 2.
47 See id. at 2.
43 See
at 2.
40 See
the Commission should not send the
wrong signal to bitcoin manipulators—
who, the commenter asserts, currently
operate with impunity—by approving a
bitcoin ETP.42 Another commenter
believes that the volatility of bitcoin
trading does not appear to be the result
of natural trading and in the long run
would prevent true price discovery.43
One commenter asserts that, in an
unregulated market, a small minority
can manipulate the price of bitcoin and
other ‘‘altcoins’’ and that bitcoin and
other cryptocurrencies are freely
manipulated by players who hold a
disproportionate amount of
cryptocurrencies or access to fiat
currencies. This commenter cites data
showing that 4.11% of bitcoin addresses
own 96.53% of all the bitcoin in
circulation, that the top four addresses
control 3.13% of all bitcoin currently in
distribution (worth over $4 billion), and
that 115 individuals control bitcoin
worth over $24 billion.44 In contrast,
another commenter states that, although
a small number of wallets may own
90% of available bitcoin, exchanges
own some of these wallets and may hold
bitcoin on behalf of hundreds,
thousands, or millions of people.45
One commenter asserts that
widespread pump-and-dump schemes
organized through the messaging
platform ‘‘Telegram’’ are evidence of
manipulation.46 This commenter further
cites an inquiry by then-New York
Attorney General Eric Schneiderman
into cryptocurrency exchanges and the
use of trading ‘‘bots’’ on those
exchanges to manipulate the market,
and asserts that such activity can drive
prices above fair market value by over
300%. The commenter notes the Kraken
exchange’s refusal to cooperate with this
inquiry and believes that this refusal
should pose serious questions for
investors and the Commission about the
Kraken exchange’s operations,
particularly after the Kraken exchange
recently exited the Japanese market due
to regulatory requirements.47
One commenter states that a
commonly cited factor mitigating
possible susceptibility to manipulation
is the securities exchanges’ own
surveillance procedures, in addition to
the futures exchanges’ surveillance
procedures and market surveillance and
oversight by the Commodity Futures
Trading Commission (‘‘CFTC’’). This
commenter cites statements by the
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43939
CFTC that it has the legal authority and
means to police certain spot markets for
fraud and manipulation through
‘‘heightened review’’ collaboration with
exchanges, that exchanges will provide
the CFTC surveillance team with trade
settlement data upon request, and that
the exchanges will enter into
information-sharing agreements with
spot market platforms and monitor
trading activity on the spot markets. The
commenter also states that the Gemini
exchange has announced that it would
use Nasdaq’s market surveillance
system to monitor its marketplace.48
This commenter further asserts that
market surveillance is generally a
prerequisite to identifying potential
market manipulation and discourages
market manipulation. The commenter
believes that the emergence of
institutionalized market surveillance on
both futures and spot markets is a
positive sign for the long-term future of
bitcoin markets.49 The commenter
suggests that the Commission, in
coordination with the CFTC, selfregulatory organizations, bitcoin futures
exchanges, and bitcoin spot market
platforms, could gather market
surveillance data to conduct an
independent analysis of trade and
settlement patterns and determine
whether potentially manipulative
trading practices occur on bitcoin spot
and futures markets.50
3. Analysis
Unlike previous proposals for bitcoinbased ETPs,51 the Exchange does not
assert here that bitcoin prices or markets
are inherently resistant to manipulation.
A number of commenters, however,
have noted the potential for
manipulation in bitcoin markets.52
Instead, the Exchange asserts that its
existing surveillance procedures
(including its ability to review activity
by its members) and its ability to share
surveillance information with U.S.
futures exchanges are sufficient to meet
the requirements of Exchange Act
48 See
NERA Letter, supra note 9, at 4–5.
id. at 5.
50 See id.
51 See Winklevoss Order, supra note 28, 83 FR at
37582 (noting exchange argument that ‘‘intrinsic
properties of bitcoin and bitcoin markets make
manipulation ‘difficult and prohibitively costly’ ’’);
Order Disapproving Proposed Rule Change, as
Modified by Amendment No. 1, Relating to the
Listing and Trading of Shares of the SolidX Bitcoin
Trust, Securities Exchange Act Release No. 80319
(Mar. 28, 2017), 82 FR 16247, 16251 (Apr. 3, 2017)
(SR–NYSEArca–2016–101) (noting that study
commissioned by trust sponsor argues that ‘‘the
underlying market for bitcoin is inherently resistant
to manipulation’’).
52 See supra notes 41–47 and accompanying text.
49 See
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Section 6(b)(5).53 One commenter also
asserts that the exchange’s own
surveillance procedures, along with
market surveillance and oversight by the
CFTC, can mitigate manipulation.54
While the Exchange would, pursuant
to its listing rules, be able to obtain
certain information regarding trading in
the Shares and in the underlying bitcoin
or any bitcoin derivative through
registered market makers,55 this trade
information would be limited to the
activities of market participants who
trade on the Exchange. Furthermore,
neither the Exchange’s ability to surveil
trading in the Shares nor its ability to
share surveillance information with
other securities exchanges trading the
Shares would give the Exchange insight
into the activity and identity of market
participants who trade in bitcoin futures
contracts or other bitcoin derivatives or
who trade in the underlying bitcoin spot
markets, where a substantial majority of
trading, the Commission concluded in
the Winklevoss Order, ‘‘occurs on
unregulated venues overseas that are
relatively new and that, generally,
appear to trade only digital assets.’’ 56
Thus, consistent with its determination
in the Winklevoss Order,57 and with the
Commission’s previous orders
approving commodity-futures ETPs,58
the Commission believes that the
Exchange must demonstrate that it has
in place a surveillance-sharing
agreement with a regulated market of
significant size related to bitcoin,
because ‘‘[s]uch agreements provide a
necessary deterrent to manipulation
because they facilitate the availability of
53 See
Notice, supra note 3, 82 FR at 61105.
supra notes 48–49 and accompanying text.
This commenter also suggests that the
Commission—in coordination with the CFTC,
SROs, futures markets, and bitcoin spot platforms—
could gather market surveillance data to
independently analyze whether manipulative
practices occur on bitcoin spot and futures
platforms. See supra note 50 and accompanying
text. As noted above, however, it is the Exchange
that bears the burden to demonstrate that its
proposal is designed to ‘‘prevent fraudulent and
manipulative acts and practices.’’ See supra notes
23–26 and accompanying text.
55 See Notice, supra note 3, at 82 FR 61105 (‘‘The
Exchange is also able to obtain information
regarding trading in the Shares, the commodity
underlying futures or options on futures through
ETP [Exchange Trading Permit] Holders, in
connection with such ETP Holders’ proprietary or
customer trades which they effect through ETP
Holders on any relevant market.’’).
56 Winklevoss Order, supra note 28, 83 FR at
37580.
57 See id. at 37591 (finding that ‘‘traditional
means’’ of surveillance were not sufficient in the
absence of a surveillance-sharing agreement with a
regulated market of significant size related to the
underlying asset).
58 See supra note 33 and accompanying text
(noting previous commodity-futures ETPs where
surveillance sharing in place between ETP listing
exchange and underlying futures exchanges).
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54 See
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information needed to fully investigate
a manipulation if it were to occur.’’ 59
The Exchange represents that it is able
to share surveillance information with
CME and CFE, which are bitcoin futures
markets regulated by the CFTC, through
membership in the Intermarket
Surveillance Group.60 Nonetheless, the
Commission must disapprove the
proposal, because there is no evidence
in the record demonstrating that CME’s
and CFE’s bitcoin futures markets are
markets of significant size.
The Order Instituting Proceedings
sought comment on whether the CME
and CFE bitcoin futures markets are
markets of significant size,61 but the
Exchange has not responded to any of
the questions in the Order Instituting
Proceedings, and the only analysis of
the underlying futures markets the
Exchange has provided in its proposed
rule change are the generic statements
that the market for bitcoin futures
contracts ‘‘has very limited trading and
operational history’’ and that the
liquidity of these markets will depend
on supply and demand, the adoption of
bitcoin, and interest in the market for
these futures.62 Thus, there is no basis
in the record on which the Commission
can conclude that the bitcoin futures
markets are markets of significant size.
Publicly available data show that the
median daily notional trading volume,
from inception through August 10,
2018, has been 14,185 bitcoins on CME
and 5,184 bitcoins on CFE, and that the
median daily notional value of open
interest on CME and CFE during the
same period has been 10,145 bitcoins
and 5,601 bitcoins, respectively.63 But
while these futures contract figures are
readily available, meaningful analysis of
the size of the CME or CFE markets
relative to the underlying bitcoin spot
market is challenging, because reliable
data about the spot market, including its
overall size, are unavailable.64
The Commission also notes that in
recent testimony CFTC Chairman
59 Winklevoss Order, supra note 28, 83 FR at
37580 (quoting Amendment to Rule Filing
Requirements for Self-Regulatory Organizations
Regarding New Derivative Securities Products,
Securities Exchange Act Release No. 40761 (Dec. 8,
1998), 63 FR 70952, 70954, 70959 (Dec. 22, 1998)
(File No. S7–13–98)).
60 See https://www.isgportal.org/isgPortal/public/
members.htm (listing the current members and
affiliate members of the Intermarket Surveillance
Group).
61 See Order Instituting Proceedings, supra note 7,
83 FR at 13539.
62 Notice, supra note 3, 82 FR at 61103; see also
supra note 19 and accompanying text.
63 These volume figures were calculated by
Commission staff using data published by CME and
CFE on their websites.
64 See Winklevoss Order, supra note 28, 83 FR at
37601.
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Giancarlo characterized the volume of
the bitcoin futures markets as ‘‘quite
small.’’ 65 Additionally, the President
and COO of CFE, recently
acknowledged in a letter to the
Commission staff that ‘‘the current
bitcoin futures trading volumes on Cboe
Futures Exchange and CME may not
currently be sufficient to support ETPs
seeking 100% long or short exposure to
bitcoin.’’ 66 These statements reinforce
the Commission’s conclusion that there
is insufficient evidence to determine
that the CME and CFE bitcoin futures
markets are markets of significant size.
Furthermore, while the Exchange
represents that no more than 10% of the
net assets of a Fund in the aggregate
invested in bitcoin futures contracts will
be invested in contracts whose principal
market is neither a member of the
Intermarket Surveillance Group nor a
market with whom the Exchange has a
comprehensive surveillance-sharing
agreement,67 this does not function as a
meaningful limitation where, as here,
there is no minimum amount of a Fund
that must be invested in such contracts.
According to the Notice, in the event
position, price, or accountability limits
are reached with respect to bitcoin
futures contracts, each Fund may invest
in listed options on bitcoin futures
contracts (should such listed options
become available) and OTC swap
agreements referencing bitcoin futures
contracts.68 The Notice does not
establish any limit on the Funds’
holdings of these other bitcoin-related
derivatives; it provides no analysis of
the size and liquidity of markets for
those derivatives; and it does not
discuss whether the Exchange has the
ability to share surveillance information
65 CFTC Chairman Giancarlo testified: ‘‘It is
important to put the new Bitcoin futures market in
perspective. It is quite small with open interest at
the CME of 6,695 bitcoin and at Cboe Futures
Exchange (Cboe) of 5,569 bitcoin (as of Feb. 2,
2018). At a price of approximately $7,700 per
Bitcoin, this represents a notional amount of about
$94 million. In comparison, the notional amount of
the open interest in CME’s WTI crude oil futures
was more than one thousand times greater, about
$170 billion (2,600,000 contracts) as of Feb[.] 2,
2018 and the notional amount represented by the
open interest of Comex gold futures was about $74
billion (549,000 contracts).’’ See Written Testimony
of J. Christopher Giancarlo, Chairman, Commodity
Futures Trading Commission, Before the Senate
Banking Committee at text accompanying nn. 14–
15 (Feb. 6, 2018). See also Winklevoss Order, supra
note 28, 83 FR at 37601 (citing Giancarlo
testimony).
66 Letter from Chris Concannon, President and
COO, Cboe Global Markets, to Dalia Blass, Director,
Division of Investment Management, Commission,
at 5 (Mar. 23, 2018), available at https://
www.sec.gov/divisions/investment/cboe-globalmarkets-innovation-cryptocurrency.pdf.
67 See supra note 17 and accompanying text.
68 See Notice, supra note 3, 83 FR at 61102; see
also supra note 18 and accompanying text.
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with the markets for these derivatives.
Thus, as to what might be a substantial
proportion of the Funds’ portfolios, the
Commission is unable to conclude that
surveillance-sharing will be available,
that the related markets are regulated, or
that the related markets are of
significant size.
While one commenter suggests that
the market for bitcoin derivatives other
than exchange-traded futures appears to
be developing—and that the offering of
long and short bitcoin ETPs ‘‘raises the
possibility that market makers in
Bitcoin derivatives could make twosided markets if interest in both the long
and short ETFs is similar in
magnitude’’ 69—these speculative
statements do not provide a basis for the
Commission to conclude that the nonexchange-traded bitcoin derivatives
market is now, or may eventually be, of
significant size.
The Commission therefore concludes
that Exchange has not demonstrated that
it has entered into a surveillancesharing agreement with a regulated
market of significant size related to
bitcoin, or that, given the current
absence of such an agreement, the
exchange’s own surveillance procedures
described above would, by themselves,
be sufficient to satisfy the requirement
of Exchange Act Section 6(b)(5) that an
exchange’s rules be designed to prevent
fraudulent and manipulative acts and
practices.70 While CME and CFE are
regulated markets for bitcoin
derivatives, there is no basis in the
record for the Commission to conclude
that these markets are of significant size.
Additionally, because bitcoin futures
have been trading on CME and CFE only
since December 2017, the Commission
has no basis on which to predict how
these markets may grow or develop over
time, or whether or when they may
reach significant size.
Although the Exchange has not
demonstrated that a regulated bitcoin
futures market of significant size
currently exists, the Commission is not
suggesting that the development of such
a market would automatically require
approval of a proposed rule change
seeking to list and trade shares of an
ETP holding bitcoins as an asset. The
Commission would need to analyze the
facts and circumstances of any
particular proposal and examine
whether any unique features of a bitcoin
futures market would warrant further
analysis before approval.
69 See
70 See
supra notes 39–40 and accompanying text.
15 U.S.C. 78f(b)(5).
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C. Protecting Investors and the Public
Interest
1. Comments Received
One commenter states that approval
of a bitcoin ETP on a U.S.-regulated
exchange would protect small traders
and increase exposure to a new asset
class in a safe manner.71 Another
commenter states that if the
Commission rejects bitcoin ETPs, it will
push investors to unregulated and
possibly unsafe environments.72
One commenter believes that, while
the Commission should deny the
proposed ETPs, it should regulate this
environment to stop individual
consumers from coming to financial
harm.73
One commenter suggests that the
Commission could address some of its
concerns about the proposed ETPs by
working with self-regulatory
organizations, and in particular FINRA,
to create bitcoin and cryptocurrencyrelated asset suitability requirements. In
addition, this commenter suggests that
targeted disclosure requirements could
make investors aware of volatility,
discourage retail investors from
investing more than a small portion of
their portfolio in cryptocurrency-related
assets, and present historical scenarios
to retail investors to demonstrate how
an instrument such as a particular
bitcoin ETP would have performed over
time. This commenter believes that
suitability requirements are less
prescriptive than an effective ban on a
class of product and that they could
balance the Commission’s interest in
protecting retail investors against its
interest in allowing cryptocurrencyrelated asset markets to continue to
develop in regulated markets where the
Commission can observe their
performance closely.74
Several commenters assert that the
Commission should deny the proposed
ETPs to help protect the public from
exposure to financial risk from an
unregulated market.75 One commenter
asserts that, while the risk posed by the
cash-settled futures products is mostly
contained, a bitcoin ETP would expose
the public to significant financial risk
due to a highly volatile, unregulated,
and manipulated market in bitcoin as
well as cryptocurrencies in general.76
Several commenters further believe that
before the Commission approves a
71 See
Mohammed Letter, supra note 9.
72 See Fink Letter, supra note 9.
73 See Fitzgerald Letter, supra note 9, at 2.
74 See NERA Letter, supra note 9, at 5–6.
75 See Desai Letter, supra note 9, at 1; Kohen
Letter, supra note 9; Kumar Letter, supra note 9;
Malkin Letter, supra note 9, at 2.
76 See Desai Letter, supra note 9, at 1.
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43941
bitcoin ETP, there should be a proper
legal and regulatory framework put in
place by a suitable governmental body
to prevent manipulation and protect the
public.77 Another commenter refers to
the proposed ETPs as a ‘‘house of cards’’
and expresses concern that the Funds’
attempt to replicate the bitcoin futures
markets, which are related to underlying
cryptocurrencies that trade on
unregulated exchanges, will lead to
losses for retail investors, and that the
inclusion of an inverse Fund will add to
the risk.78
2. Analysis
The Exchange asserts that approval of
the proposal would enhance
competition among market participants,
to the benefit of investors,79 and two
commenters assert that approval would
protect investors by permitting them to
seek exposure to bitcoin through a safer,
regulated market.80 Other commenters
suggest that the Commission should
either seek to regulate the underlying
bitcoin markets,81 or should seek to
protect investors through disclosure
requirements or suitability standards,
rather than disapproving a bitcoin-ETP
proposal.82 Several other commenters,
however, assert that approval of a
bitcoin-based ETP would expose
investors to risks from unregulated
bitcoin markets.83
The Commission acknowledges that,
compared to trading in unregulated
bitcoin spot markets, trading a bitcoinbased ETP on a national securities
exchange may provide some additional
protection to investors, but the
Commission must consider this
potential benefit in the broader context
of whether the proposal meets each of
the applicable requirements of the
Exchange Act. Pursuant to Section
19(b)(2) of the Exchange Act, the
Commission must disapprove a
proposed rule change filed by a national
securities exchange if it does not find
that the proposed rule change is
consistent with the applicable
requirements of the Exchange Act—
including the requirement under
Section 6(b)(5) that the rules of a
national securities exchange be
designed to prevent fraudulent and
manipulative acts and practices.
Thus, even if a proposed rule change
would provide certain benefits to
77 See Desai Letter, supra note 9, at 1, 2; Kumar
Letter, supra note 9; Malkin Letter, supra note 9, at
2.
78 See Kohen Letter, supra note 9.
79 See Notice, supra note 3, 82 FR at 61106.
80 See supra notes 71–72 and accompanying text.
81 See supra note 73 and accompanying text.
82 See supra note 74 and accompanying text.
83 See supra notes 75–78 and accompanying text.
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Federal Register / Vol. 83, No. 167 / Tuesday, August 28, 2018 / Notices
investors and the markets, the proposed
rule change may still fail to meet other
requirements under the Exchange Act.
For the reasons discussed above, the
Exchange has not met its burden of
demonstrating an adequate basis in the
record for the Commission to find that
the proposal is consistent with
Exchange Act Section 6(b)(5), and,
accordingly, the Commission must
disapprove the proposal.
D. Other Comments
Comment letters also addressed the
intrinsic value of bitcoin; 84 the desire of
investors to gain access to bitcoin
through an ETP; 85 investor
understanding about bitcoin; 86 the
volatility of bitcoin prices,87 the
regulation of bitcoin spot markets,88 the
operation and valuation of the proposed
ETPs,89 the potential impact of
Commission approval of the proposed
ETP on the price of bitcoin,90 and the
legitimacy that Commission approval of
the proposed ETP might confer upon
bitcoin as a digital asset.91 Ultimately,
however, additional discussion of these
tangential topics is unnecessary, as they
do not bear on the basis for the
Commission’s decision to disapprove
the proposal.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.93
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018–18572 Filed 8–27–18; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
Self-Regulatory Organizations; NYSE
National, Inc.; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Amend Rule 7.31
Relating to Reserve Orders and ReName Two Order Types
August 22, 2018.
The record before the Commission
does not provide a basis for the
Commission to conclude that the
Exchange has met its burden under the
Exchange Act and the Commission’s
Rules of Practice to demonstrate that its
proposed rule change is consistent with
Exchange Act Section 6(b)(5).92
Pursuant to Section 19(b)(1) 1 of the
Securities Exchange Act of 1934
(‘‘Act’’) 2 and Rule 19b–4 thereunder,3
notice is hereby given that on August 9,
2018, NYSE National, Inc. (‘‘Exchange’’
or ‘‘NYSE National’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III below, which Items have been
prepared by the self-regulatory
organization. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
For the reasons set forth above, the
Commission does not find, pursuant to
Section 19(b)(2) of the Exchange Act,
that the proposed rule change is
consistent with the requirements of the
84 See
Ahn Letter, supra note 9.
Fink Letter, supra note 9; Kaleda Letter,
supra note 9; Moberg Letter, supra note 9; Rousseau
Letter, supra note 9; Santos Letter, supra note 9.
86 See Desai Letter, supra note 9, at 1; Kumar
Letter, supra note 9.
87 See Desai Letter, supra note 9, at 1; Malkin
Letter, supra note 9, at 1.
88 See Desai Letter, supra note 9, at 1; Fitzgerald
Letter, supra note 9, at 1; Kumar Letter, supra note
9; Malkin Letter, supra note 9, at 1; Mohammed
Letter, supra note 9.
89 See Desai Letter, supra note 9, at 1; Malkin
Letter, supra note 9, at 1; Kumar Letter, supra note
9; NERA Letter, supra note 9, at 1–2, 3, 5.
90 See Santos Letter, supra note 9.
91 See Desai Letter, supra note 9, at 1, 2; Kumar
Letter, supra note 9; Santos Letter, supra note 9.
92 In disapproving the proposed rule change, the
Commission has considered its impact on
efficiency, competition, and capital formation. See
15 U.S.C. 78c(f).
85 See
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II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
self-regulatory organization included
statements concerning the purpose of,
and basis for, the proposed rule change
and discussed any comments it received
on the proposed rule change. The text
of those statements may be examined at
the places specified in Item IV below.
The Exchange has prepared summaries,
set forth in sections A, B, and C below,
of the most significant parts of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
1. Purpose
[Release No. 34–83900; File No. SR–
NYSENAT–2018–19]
E. Basis for Disapproval
IV. Conclusion
daltland on DSKBBV9HB2PROD with NOTICES
Exchange Act and the rules and
regulations thereunder applicable to a
national securities exchange, and in
particular, with Section 6(b)(5) of the
Exchange Act.
It is therefore ordered, pursuant to
Section 19(b)(2) of the Exchange Act,
that proposed rule change SR–
NYSEArca–2017–139 is disapproved.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend
Rule 7.31 relating to Reserve Orders and
re-name two order types. The proposed
rule change is available on the
Exchange’s website at www.nyse.com, at
the principal office of the Exchange, and
at the Commission’s Public Reference
Room.
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 15 U.S.C. 78a.
3 17 CFR 240.19b–4.
The Exchange proposes to amend
Rule 7.31 relating to Reserve Orders and
re-name two order types.
Background
Rule 7.31(d)(1) defines a Reserve
Order as a Limit or Inside Limit Order
with a quantity of the size displayed
and with a reserve quantity of the size
(‘‘reserve interest’’) that is not
displayed. The displayed quantity of a
Reserve Order is ranked Priority 2—
Display Orders and the reserve interest
is ranked Priority 3—Non-Display
Orders.4 Rule 7.31(d)(1)(A) provides
that on entry, the display quantity of a
Reserve Order must be entered in round
lots and the displayed portion of a
Reserve Order will be replenished
following any execution. That rule
further provides that the Exchange will
display the full size of the Reserve
Order when the unfilled quantity is less
than the minimum display size for the
order. Rule 7.31(d)(1)(B) provides that
each time a Reserve Order is
replenished from reserve interest, a new
working time is assigned to the
replenished quantity of the Reserve
Order, while the reserve interest retains
the working time of original order entry.
Pursuant to Rule 7.31(d)(1)(C), a Reserve
Order must be designated Day and may
be combined with a Limit Non-Routable
Order or a Primary Pegged Order.
Rule 7.31(d)(2) defines a ‘‘Limit NonDisplayed Order,’’ which is a Limit
Order that is not displayed and does not
route. Rule 7.31(e)(1) defines a ‘‘Limit
Non-Routable Order,’’ which is a Limit
Order that does not route.
93 17
1 15
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4 The terms ‘‘Priority 2—Display Orders’’ and
‘‘Priority 3—Non-Display Orders’’ are defined in
Rule 7.36(e).
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]]>Agencies
[Federal Register Volume 83, Number 167 (Tuesday, August 28, 2018)]
[Notices]
[Pages 43934-43942]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-18572]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-83904; File No. SR-NYSEArca-2017-139]
Self-Regulatory Organizations; NYSE Arca, Inc.; Order
Disapproving a Proposed Rule Change To List and Trade the Shares of the
ProShares Bitcoin ETF and the ProShares Short Bitcoin ETF
August 22, 2018.
I. Introduction
On December 4, 2017, NYSE Arca, Inc. (``NYSE Arca'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to list and trade the shares
(``Shares'') of the ProShares Bitcoin ETF and the ProShares Short
Bitcoin ETF (each a ``Fund'' and, collectively, the ``Funds'') issued
by the ProShares Trust II (``Trust'') under NYSE Arca Rule 8.200-E,
Commentary .02. The proposed rule change was published for comment in
the Federal Register on December 26, 2017.\3\ The comment period for
the Notice of Proposed Rule Change closed on January 16, 2018.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 82350 (Dec. 19,
2017), 82 FR 61100 (Dec. 26, 2017) (``Notice'').
---------------------------------------------------------------------------
On January 30, 2018, pursuant to Section 19(b)(2) of the Exchange
Act,\4\ the Commission designated a longer period within which to
approve the proposed rule change, disapprove the proposed rule change,
or institute proceedings to determine whether to approve or disapprove
the proposed rule change.\5\ On March 23, 2018, the Commission
instituted proceedings under Section 19(b)(2)(B) of the Exchange Act
\6\ to determine whether to approve or disapprove the proposed rule
change.\7\ The comment period and rebuttal comment period for the Order
Instituting Proceedings closed on April 19, 2018, and May 3, 2018,
respectively. Finally, on June 15, 2018, the Commission extended the
period for consideration of the proposed rule change to August 23,
2018.\8\ As of
[[Page 43935]]
August 21, 2018, the Commission had received 13 comments on the
proposed rule change.\9\
---------------------------------------------------------------------------
\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 82602 (Jan. 30,
2018), 83 FR 4941 (Feb. 2, 2018).
\6\ 15 U.S.C. 78s(b)(2)(B).
\7\ See Securities Exchange Act Release No. 82939 (Mar. 23,
2018), 83 FR 13537 (Mar. 29, 2018) (``Order Instituting
Proceedings'').
\8\ See Securities Exchange Act Release No. 83452 (June 15,
2018), 83 FR 28894 (June 21, 2018).
\9\ See Letters from Abe Kohen, AK Financial Engineering
Consultants, LLC (Dec. 27, 2017) (``Kohen Letter''); Anita Desai
(Apr. 6, 2018) (``Desai Letter''); Ed Kaleda (Apr. 6, 2018)
(``Kaleda Letter''); Scott Moberg (Apr. 6, 2018) (``Moberg
Letter''); Adam Malkin (Apr. 8, 2018) (``Malkin Letter''); Gisan
Mohammed (Apr. 11, 2018) (``Mohammed Letter''); Shravan Kumar (Apr.
11, 2018) (``Kumar Letter''); Louise Fitzgerald (Apr. 19, 2018)
(``Fitzgerald Letter''); Joshua Rousseau (Apr. 30, 2018) (``Rousseau
Letter''); Thomas W. Fink (May 3, 2018) (``Fink Letter''); Sharon
Brown-Hruska, Managing Director, and Trevor Wagener, Consultant,
NERA Economic Consulting (May 18, 2018) (``NERA Letter''); Sami
Santos (Aug. 9, 2018) (``Santos Letter''); and Sam M. Ahn (Aug. 16,
2018) (``Ahn Letter''). All comments on the proposed rule change are
available on the Commission's website at: https://www.sec.gov/comments/sr-nysearca-2017-139/nysearca2017139.htm.
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This order disapproves the proposed rule change. Although the
Commission is disapproving this proposed rule change, the Commission
emphasizes that its disapproval does not rest on an evaluation of
whether bitcoin, or blockchain technology more generally, has utility
or value as an innovation or an investment. Rather, the Commission is
disapproving this proposed rule change because, as discussed below, the
Exchange has not met its burden under the Exchange Act and the
Commission's Rules of Practice to demonstrate that its proposal is
consistent with the requirements of the Exchange Act Section 6(b)(5),
in particular the requirement that a national securities exchange's
rules be designed to prevent fraudulent and manipulative acts and
practices.\10\ Among other things, the Exchange has offered no record
evidence to demonstrate that bitcoin futures markets are ``markets of
significant size.'' That failure is critical because, as explained
below, the Exchange has failed to establish that other means to prevent
fraudulent and manipulative acts and practices will be sufficient, and
therefore surveillance-sharing with a regulated market of significant
size related to bitcoin is necessary to satisfy the statutory
requirement that the Exchange's rules be designed to prevent fraudulent
and manipulative acts and practices.\11\
---------------------------------------------------------------------------
\10\ See 15 U.S.C. 78f(b)(5).
\11\ See infra notes 29-31 and accompanying text.
---------------------------------------------------------------------------
II. Description of the Proposal
The Exchange proposes to list and trade the Shares under NYSE Arca
Rule 8.200-E, Commentary .02, which governs the listing and trading of
Trust Issued Receipts on the Exchange.\12\ Each Fund will be a series
of the Trust, and the Trust and the Funds will be managed and
controlled by ProShare Capital Management LLC (``Sponsor''). Brown
Brothers Harriman & Co. will be the custodian and administrator for the
Trust. SEI Investments Distribution Co. will serve as the distributor
of the Shares (``Distributor''). The Trust will offer Shares of the
Funds for sale through the Distributor in ``Creation Units.'' \13\
---------------------------------------------------------------------------
\12\ See NYSE Arca Rule 8.200-E, Commentary .02. NYSE Arca Rule
8.200-E permits the listing and trading of ``Trust Issued
Receipts,'' defined as a security (1) that is issued by a trust
which holds specific securities deposited with the trust; (2) that,
when aggregated in some specified minimum number, may be surrendered
to the trust by the beneficial owner to receive the securities; and
(3) that pay beneficial owners dividends and other distributions on
the deposited securities, if any are declared and paid to the
trustee by an issuer of the deposited securities. Commentary .02
applies to Trust Issued Receipts that invest in any combination of
investments, including cash; securities; options on securities and
indices; futures contracts; options on futures contracts; forward
contracts; equity caps, collars, and floors; and swap agreements.
\13\ See Notice, supra note 3, 82 FR at 61101.
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According to the Notice, the ProShares Bitcoin ETF's investment
objective will be to seek results (before fees and expenses) that, both
for a single day and over time, correspond to the performance of lead-
month bitcoin futures contracts \14\ listed and traded on either the
Cboe Futures Exchange (``CFE'') or the Chicago Mercantile Exchange
(``CME'') (``Benchmark Futures Contract''). This Fund generally intends
to invest substantially all of its assets in the Benchmark Futures
Contracts, but may invest in other U.S. exchange-listed bitcoin futures
contracts, if available (together with Benchmark Futures Contracts,
collectively, ``Bitcoin Futures Contracts'').\15\
---------------------------------------------------------------------------
\14\ According to the Exchange, lead-month futures contracts are
the monthly contracts with the earliest expiration date. See Notice,
supra note 3, 82 FR at 61101, n.6.
\15\ See Notice, supra note 3, 82 FR at 61101.
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According to the Notice, the ProShares Short Bitcoin ETF's
investment objective will be to seek results, for a single day, that
correspond (before fees and expenses) to the inverse of the daily
performance of the Benchmark Futures Contract. This Fund generally
intends to invest substantially all of its assets through short
positions in Benchmark Futures Contracts, but may invest through short
positions in Bitcoin Futures Contracts, if available.\16\
---------------------------------------------------------------------------
\16\ See id.
---------------------------------------------------------------------------
The Exchange represents that no more than 10% of the net assets of
a Fund in the aggregate invested in Bitcoin Futures Contracts shall
consist of Bitcoin Futures Contracts whose principal market is neither
a member of the Intermarket Surveillance Group nor a market with which
the Exchange does not have a comprehensive surveillance-sharing
agreement.\17\ Further, according to the Notice, in the event that
position, price, or accountability limits are reached with respect to
Bitcoin Futures Contracts, each Fund may invest in listed options on
Bitcoin Futures Contracts (should such listed options become available)
and OTC swap agreements referencing Bitcoin Futures Contracts
(collectively, ``Financial Instruments'').\18\ The Notice also states:
---------------------------------------------------------------------------
\17\ See id. at 61105.
\18\ See id. at 61102.
Bitcoin Futures Contracts are a new type of futures contract to
be traded on the CFE and CME or other U.S. exchanges (if available).
Unlike the established futures markets for traditional physical
commodities, the market for Bitcoin Futures Contracts is in the
development stage and has very limited trading and operational
history. As such, the liquidity of the market for Bitcoin Futures
Contracts will depend on, among other things, the supply and demand
for Bitcoin Futures Contracts, the adoption of bitcoin and the
commercial and speculative interest in the market for Bitcoin
Futures Contracts and the potential ability to hedge against the
price of bitcoin with exchange-traded Bitcoin Futures Contracts.\19\
---------------------------------------------------------------------------
\19\ Id. at 61103.
The Exchange represents that trading in the Shares of each Fund
will be subject to the existing trading surveillances administered by
the Exchange, as well as cross-market surveillances administered by
FINRA on behalf of the Exchange, which are designed to detect
violations of Exchange rules and applicable federal securities
laws.\20\ The Exchange asserts that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions
and to deter and detect violations of Exchange rules and federal
securities laws applicable to trading on the Exchange.\21\
---------------------------------------------------------------------------
\20\ See id. at 61105.
\21\ See id.
---------------------------------------------------------------------------
III. Discussion
A. The Applicable Standard for Review
The Commission must consider whether the Exchange's proposal is
consistent with Exchange Act Section 6(b)(5), which requires, in
relevant part, that the rules of a national securities exchange be
designed ``to prevent fraudulent and manipulative acts and practices''
and ``to protect investors and the public interest.'' \22\ Under the
Commission's Rules of Practice, the ``burden to demonstrate that a
proposed rule change is consistent with the Exchange Act and the rules
and regulations issued thereunder . . . is on
[[Page 43936]]
the self-regulatory organization [`SRO'] that proposed the rule
change.'' \23\
---------------------------------------------------------------------------
\22\ 15 U.S.C. 78f(b)(5).
\23\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR
201.700(b)(3).
---------------------------------------------------------------------------
The description of a proposed rule change, its purpose and
operation, its effect, and a legal analysis of its consistency with
applicable requirements must all be sufficiently detailed and specific
to support an affirmative Commission finding,\24\ and any failure of an
SRO to provide this information may result in the Commission not having
a sufficient basis to make an affirmative finding that a proposed rule
change is consistent with the Exchange Act and the applicable rules and
regulations.\25\ Moreover, ``unquestioning reliance'' on an SRO's
representations in a proposed rule change is not sufficient to justify
Commission approval of a proposed rule change.\26\
---------------------------------------------------------------------------
\24\ See id.
\25\ See id.
\26\ See Susquehanna Int'l Group, LLP v. Securities and Exchange
Commission, 866 F.3d 442, 447 (D.C. Cir. 2017).
---------------------------------------------------------------------------
B. Preventing Fraudulent and Manipulative Practices
1. Applicable Legal Standard
To approve the Exchange's proposal to list the Shares, the
Commission must be able to find that the proposal is, consistent with
Exchange Act Section 6(b)(5), ``designed to prevent fraudulent and
manipulative acts and practices.'' \27\ As the Commission recently
explained in an order disapproving a listing proposal for the
Winklevoss Bitcoin Trust (``Winklevoss Order''), although surveillance-
sharing agreements are not the exclusive means by which an exchange-
traded product (``ETP'') listing exchange can meet its obligations
under Exchange Act Section 6(b)(5), such agreements are a widely used
means for exchanges that list ETPs to meet their obligations, and the
Commission has historically recognized their importance.\28\
---------------------------------------------------------------------------
\27\ 15 U.S.C. 78f(b)(5).
\28\ Order Setting Aside Action by Delegated Authority and
Disapproving a Proposed Rule Change, as Modified by Amendments No. 1
and 2, To List and Trade Shares of the Winklevoss Bitcoin Trust,
Securities Exchange Act Release No. 83723 (July 26, 2018), 83 FR
37579, 37580 (Aug. 1, 2018) (SR-BatsBZX-2016-30).
---------------------------------------------------------------------------
The Commission has therefore determined that, if the listing
exchange for an ETP fails to establish that other means to prevent
fraudulent and manipulative acts and practices will be sufficient, the
listing exchange must enter into a surveillance-sharing agreement with
a regulated market of significant size because ``[s]uch agreements
provide a necessary deterrent to manipulation because they facilitate
the availability of information needed to fully investigate a
manipulation if it were to occur.'' \29\ Accordingly, a surveillance-
sharing agreement with a regulated market of significant size is
required to ensure that, in compliance with the Exchange Act, the
proposal is ``designed to prevent fraudulent and manipulative acts and
practices.'' \30\ In this context, the Commission has interpreted the
terms ``significant market'' and ``market of significant size'' to
include a market (or group of markets) as to which (a) there is a
reasonable likelihood that a person attempting to manipulate the ETP
would also have to trade on that market to successfully manipulate the
ETP, so that a surveillance-sharing agreement would assist the ETP
listing market in detecting and deterring misconduct, and (b) it is
unlikely that trading in the ETP would be the predominant influence on
prices in that market.\31\ Thus, a surveillance-sharing agreement must
be entered into with a ``significant market'' to assist in detecting
and deterring manipulation of the ETP, because someone attempting to
manipulate the ETP is reasonably likely to also engage in trading
activity on that ``significant market.''
---------------------------------------------------------------------------
\29\ Id. (citing Amendment to Rule Filing Requirements for Self-
Regulatory Organizations Regarding New Derivative Securities
Products, Securities Exchange Act Release No. 40761 (Dec. 8, 1998)
63 FR 70952, 70954, 70959 (Dec. 22, 1998) (File No. S7-13-98)).
\30\ 15 U.S.C. 78f(b)(5).
\31\ See Winklevoss Order, supra note 28, 83 FR at 37594. This
definition is illustrative and not exclusive. There could be other
types of ``significant markets'' and ``markets of significant
size,'' but this definition is an example that will provide guidance
to market participants. See id.
---------------------------------------------------------------------------
Although the Winklevoss Order applied these standards to a
commodity-trust ETP based on bitcoin, the Commission believes that
these standards are also appropriate for an ETP based on bitcoin
futures. When approving the first commodity-futures ETP, the Commission
specifically noted that ``[i]nformation sharing agreements with primary
markets trading index components underlying a derivative product are an
important part of a self-regulatory organization's ability to monitor
for trading abuses in derivative products.'' \32\ And the Commission's
approval orders for commodity-futures ETPs consistently note the
ability of an ETP listing exchange to share surveillance information
either through surveillance-sharing agreements or through membership by
the listing exchange and the relevant futures exchanges in the
Intermarket Surveillance Group.\33\ While the
[[Page 43937]]
Commission in those orders did not explicitly undertake an analysis of
whether the related futures markets were of ``significant size,'' the
exchanges proposing commodity-futures ETPs on a single reference asset
or benchmark generally made representations regarding the trading
volume of the underlying futures markets,\34\ and the Commission was in
each of those cases dealing with a large futures market that had been
trading for a number of years before an exchange proposed an ETP based
on those futures.\35\ And where the Commission has considered a
proposed ETP based on futures that had only recently begun trading,\36\
the Commission specifically addressed whether the futures on which the
ETP was based--which were futures on an index of well-established
commodity futures--were illiquid or susceptible to manipulation.\37\
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\32\ Securities Exchange Act Release No. 53105 (Jan. 11, 2006),
71 FR 3129, 3136 (Jan. 19, 2006) (SR-Amex-2005-059). Additionally,
the Winklevoss Order discusses the broader history and importance of
surveillance-sharing agreements relating to derivative securities
products, quoting Commission statements dating from 1990 on. See
Winklevoss Order, supra note 28, 83 FR at 37592-94.
\33\ See, e.g., Securities Exchange Act Release No. 53105 (Jan.
11, 2006), 71 FR 3129, 3136 (Jan. 19, 2006) (SR-Amex-2005-059)
(approval order noted that Amex's ``Information Sharing Agreement
with the NYMEX and the CBOT and [Amex's] Memorandum of Understanding
with the LME, along with the Exchange's participation in the ISG, in
which the CBOT participates . . . create the basis for the Amex to
monitor for fraudulent and manipulative practices in the trading of
the Shares''); Securities Exchange Act Release No. 53582 (Mar. 31,
2006), 71 FR 17510, 17518 (Apr. 6, 2006) (SR-Amex-2005-127)
(approval order noted that Amex's ``comprehensive surveillance
sharing agreements with the NYMEX and ICE Futures . . . create the
basis for the Amex to monitor for fraudulent and manipulative
practices in the trading of the Units'' and that ``[s]hould the USOF
invest in oil derivatives traded on markets such as the Singapore
Oil Market, the Exchange represents that it will file a proposed
rule change pursuant to Section 19(b) of the [Exchange] Act, seeking
Commission approval of [Amex's] surveillance agreement with such
market''); Securities Exchange Act Release No. 54013 (June 16,
2006), 71 FR 36372, 36378-79 (June 26, 2006) (NYSE-2006-17)
(approval order noted that NYSE's ``comprehensive surveillance
sharing agreements with the NYMEX, the Kansas City Board of Trade,
ICE Futures, and the LME . . . create the basis for the NYSE to
monitor for fraudulent and manipulative trading practices'' and that
``all of the other trading venues on which current Index components
and CERFs are traded are members of the ISG''); Securities Exchange
Act Release No. 54450 (Sept. 14, 2006), 71 FR 55230, 55236 (Sept.
21, 2006) (SR-Amex-2006-44) (approval order noted that ``CME, where
the futures contract for each of the current Index components is
traded, is a member of the ISG'' and that in the event of new fund
investments in ``foreign currency futures contracts traded on
futures exchanges other than CME, [Amex] must have a CSSA with that
futures exchange or the futures exchange must be an ISG member'');
Securities Exchange Act Release No. 55029 (Dec. 29, 2006), 72 FR
806, 809-10 (Jan. 8, 2007) (SR-Amex-2006-76) (approval order noted
that Amex's ``Comprehensive Surveillance Sharing Agreement with the
ICE Futures, LME, and NYMEX, . . . and membership in the Intermarket
Surveillance Group (`ISG') creates the basis for the Amex to monitor
fraudulent and manipulative practices in the trading of the
Shares''); Securities Exchange Act Release No. 56880 (Dec. 3, 2007),
72 FR 69259, 69261 (Dec. 7, 2007) (SR-Amex-2006-96) (approval order
noted that Amex has ``information sharing agreements with the
InterContinental Exchange, the Chicago Mercantile Exchange, and the
New York Mercantile Exchange and may obtain market surveillance
information from other exchanges, including the Chicago Board of
Trade, London Metals Exchange, and the New York Board of Trade
through the Intermarket Surveillance Group''); Securities Exchange
Act Release No. 55632 (Apr. 13, 2007), 72 FR 19987, 19988 (Apr. 20,
2007) (SR-Amex-2006-112) (approval order noted that Amex ``currently
has in place an Information Sharing Agreement with the NYMEX and ICE
Futures'' and that if ``USNG invests in Natural Gas Interests traded
on other exchanges, the Amex represented that it will seek to enter
into Information Sharing arrangements with those particular
exchanges''); Securities Exchange Act Release No. 57456 (Mar. 7,
2008), 73 FR 13599, 13601 (Mar. 13, 2008) (NYSEArca-2007-91)
(approval order noted that NYSEArca ``can obtain
[[Page 43938]]
market surveillance information, including customer identity
information, with respect to transactions occurring on the NYM, the
Kansas City Board of Trade, ICE, and the LME, pursuant to its
comprehensive information sharing agreements with each of those
exchanges'' and that ``[a]ll of the other trading venues on which
current Index components are traded are members of the ISG'');
Securities Exchange Act Release No. 57838 (May 20, 2008), 73 FR
30649, 30652, (May 28, 2008) (SR-NYSEArca-2008-09) (approval order
noted that NYSEArca ``may obtain information via the ISG from other
exchanges who are members or affiliate members of the ISG,'' that
NYSEArca ``has an information sharing agreement in place with ICE
Futures,'' and that NYSEArca will file a proposed rule change ``if
the Fund invests in EUAs . . . that constitute more than 10% of the
weight of the Fund where the principal trading market for such
component is not a member or affiliate member of the ISG or where
the Exchange does not have a comprehensive surveillance sharing
agreement with such market''); Securities Exchange Act Release No.
63635 (Jan. 3, 2011), 76 FR 1489, 1491 (Jan. 10, 2011) (NYSEArca-
2010-103) (approval order noted that ``with respect to Fund
components traded on exchanges, not more than 10% of the weight of
such components in the aggregate will consist of components whose
principal trading market is not a member of the Intermarket
Surveillance Group or is a market with which [NYSEArca] does not
have a comprehensive surveillance sharing agreement''); Securities
Exchange Act Release No. 66553 (Mar. 9, 2012), 77 FR 15440, 15444
(Mar. 15, 2012) (SR-NYSEArca-2012-04) (approval order noted that
NYSEArca ``can obtain market surveillance information, including
customer identity information, from ICE [Futures] and CME, which are
members of the Intermarket Surveillance Group''); Securities
Exchange Act Release No. 67223 (June 20, 2012), 77 FR 38117, 38124
(June 26, 2012) (NYSEAmex-2012-24) (approval order noted that
NYSEAmex ``can obtain market surveillance information, including
customer identity information, with respect to transactions
occurring on exchanges that are members of ISG, including CME, CBOT,
COMEX, NYMEX . . . and ICE Futures US,'' that NYSEAmex ``currently
has in place a comprehensive surveillance sharing agreement with
each of CME, NYMEX, ICE Futures Europe, and KCBOT,'' and that
``while the Fund may invest in futures contracts or options on
futures contracts which trade on markets that are not members of ISG
or with which [NYSEAmex] does not have in place a comprehensive
surveillance sharing agreement, such instruments will never
represent more than 10% of the Fund's holdings''); Securities
Exchange Act Release No. 73561 (Nov. 7, 2014), 79 FR 68329, 68330
(Nov. 14, 2014) (NYSEArca-2014-102) (approval order noted that
``FINRA may obtain trading information regarding trading in the
Shares and Coal Futures from such markets and other entities that
are members of ISG or with which [NYSEArca] has in place a
comprehensive surveillance sharing agreement'' and that ``CME is a
member of the ISG''); Securities Exchange Act Release No. 82390
(Dec. 22, 2017), 82 FR 61625, 61631, 61634 (Dec. 28, 2017)
(NYSEArca-2017-107) (approval order noted that NYSEArca ``may obtain
information regarding trading in the Shares and Freight Futures from
markets and other entities that are members of ISG or with which
[NYSEArca] has in place a CSSA'' and that ``not more than 10% of the
net assets of the Fund in the aggregate invested in Freight Futures
or options on Freight Futures shall consist of derivatives whose
principal market is not a member of the ISG or is a market with
which [NYSEArca] does not have a CSSA'').
\34\ See, e.g., Securities Exchange Act Release No. 62213 (June
3, 2010), 75 FR 32828 (June 9, 2010) (SR-NYSEArca-2010-22) (notice
of proposed rule change included NYSE Arca's representations that:
(i) Corn futures volume on Chicago Board of Trade (``CBOT'') for
2008 and 2009 (through November 30, 2009) was 59,934,739 contracts
and 47,754,866 contracts, respectively, and as of March 16, 2010,
CBOT open interest for corn futures was 1,118,103 contracts, and
open interest for near month futures was 447,554 contracts; (ii) the
corn futures contract price was $18,337.50 ($3.6675 per bushel and
5,000 bushels per contract), and the approximate value of all
outstanding contracts was $20.5 billion; (iii) as of March 16, 2010,
open interest in corn swaps cleared on CBOT was approximately 2,100
contracts, with an approximate value of $38.5 million; and (iv) the
position limits for all months is 22,000 corn contracts, and the
total value of contracts if position limits were reached would be
approximately $403.5 million (based on the $18,337.50 contract
price), Securities Exchange Act Release No. 61954 (Apr. 21, 2010),
75 FR 22663, 22664 n.10 (Apr. 29, 2010)); Securities Exchange Act
Release No. 63610 (Dec. 27, 2010), 76 FR 199 (Jan. 3, 2011) (SR-
NYSEArca-2010-101) (notice of proposed rule change included NYSE
Arca's representations that: (i) As of June 14, 2010, there was VIX
futures contracts open interest on CFE of 88,366 contracts, with a
contract price of $25.55 and value of open interest of
$2,257,751,300; (ii) total CFE trading volume in 2009 in VIX futures
contracts was 1,143,612 contracts, with average daily volume of
4,538 contracts; and (iii) total volume year-to-date (through May
31, 2010) was 1,399,709 contracts, with average daily volume of
13,458 contracts, Securities Exchange Act Release No. 63317 (Nov.
16, 2010), 75 FR 71158, 71159 n.9 (Nov. 22, 2010)); Securities
Exchange Act Release No. 63753 (Jan. 21, 2011), 76 FR 4963 (Jan. 27,
2011) (SR-NYSEArca-2010-110) (notice of proposed rule change
included NYSE Arca's representations that: (i) Natural gas futures
volume on New York Mercantile Exchange (``NYMEX'') for 2009 and 2010
(through October 29, 2010) was 47,864,639 contracts and 52,490,180
contracts, respectively; (ii) as of October 29, 2010, NYMEX open
interest for natural gas futures was 794,741 contracts, and open
interest for near month futures was 47,313 contracts; (iii) the
contract price was $40,380 ($4.038 per MMBtu and 10,000 MMBtu per
contract), and the approximate value of all outstanding contracts
was $32.1 billion; (iv) the position limits for all months is 12,000
natural gas contracts and the total value of contracts if position
limits were reached would be approximately $484.56 million (based on
the $40,380 contract price); and (v) as of October 29, 2010, open
interest in natural gas swaps cleared on NYMEX was approximately
2,618,092 contracts, with an approximate value of $26.4 billion
($4.038 per MMBtu and 2,500 MMBtu per contract), Securities Exchange
Act Release No. 63493 (Dec. 9, 2010), 75 FR 78290, 78291 n.11 (Dec.
15, 2010)); Securities Exchange Act Release No. 63869 (Feb. 8,
2011), 76 FR 8799 (Feb. 15, 2011) (SR-NYSEArca-2010-119) (notice of
proposed rule change included NYSE Arca's representations that: (i)
WTI crude oil futures volume on NYMEX for 2009 and 2010 (through
November 30, 2010) was 137,352,118 contracts and 156,155,620
contracts, respectively; (ii) as of November 30, 2010, NYMEX open
interest for WTI crude oil was 1,342,325 contracts, and open
interest for near month futures was 323,184 contracts; (iii) the
position limits for all months is 20,000 WTI crude oil contracts and
the total value of contracts if position limits were reached would
be approximately $1.68 billion (based on the $84.11 contract price);
and (iv) the contract price was $84,110 ($84.11 USD per barrel and
1,000 barrels per contract), and the approximate value of all
outstanding contracts was $112.9 billion, Securities Exchange Act
Release No. 63625 (Dec. 30, 2010), 76 FR 807, 808 n.11 (Jan. 6,
2011)); Securities Exchange Act Release No. 65134 (Aug. 15, 2011),
76 FR 52034 (Aug. 19, 2011) (SR-NYSEArca-2011-23) (notice of
proposed rule change included NYSE Arca's representations that: (i)
As of January 31, 2011, there was VIX futures contracts open
interest on CFE of 163,396 contracts with a value of open interest
of $3,461,984,900; (ii) total CFE trading volume in 2010 in VIX
futures contracts was 4,402,616 contracts, with average daily volume
of 17,741 contracts; and (iii) total volume year-to-date (through
January 31, 2011) was 779,493 contracts, with average daily volume
of 38,975 contracts, Securities Exchange Act Release No. 64470 (May
11, 2011), 76 FR 28493, 28494 n.12 (May 17, 2011)); Securities
Exchange Act Release No. 65136 (Aug. 15, 2011), 76 FR 52037 (Aug.
19, 2011) (SR-NYSEArca-2011-24) (notice of proposed rule change
included NYSE Arca's representations that: (i) Natural gas futures
volume on NYMEX for 2009 and 2010 (through December 31, 2010) was
47,864,639 contracts and 64,350,673 contracts, respectively; (ii) as
of December 31, 2010, NYMEX open interest for all natural gas
futures was 772,104 contracts, and the approximate value of all
outstanding contracts was $35,664,257,310 billion [sic]; (iii) open
interest as of December 31, 2010 for the near month contract was
166,757 contracts and the near month contract value was
$7,345,645,850 ($4.405 per MMBtu and 10,000 MMBtu per contract);
(iv) the position accountability limits for all months is 12,000
natural gas contracts and the total value of contracts if position
accountability limits were reached would be approximately
$528,600,000 million (based on the $4.405 contract price); and (v)
as of December 31, 2010, open interest in natural gas swaps cleared
on NYMEX was approximately 1,493,013 contracts, with an approximate
value of $16,463,384,003 ($4.411 per MMBtu and 2,500 MMBtu per
contract), Securities Exchange Act Release No. 64464 (May 11, 2011),
76 FR 28483, 28484 n.11 (May 17, 2011)); Securities Exchange Act
Release No. 65344 (Sept. 15, 2011), 76 FR 58549 (Sept. 21, 2011)
(SR-NYSEArca-2011-48) (notice of proposed rule change included NYSE
Arca's representations that: (i) Wheat futures volume on CBOT for
2010 and 2011 (through April 29, 2011) was 23,058,783 contracts and
8,860,135 contracts, respectively; (ii) as of April 29, 2011, open
interest for wheat futures was 456,851 contracts; (iii) the wheat
contract price was $40,062.50 (801.25 cents per bushel and 5,000
bushels per contract), and the approximate value of all outstanding
contracts was $18.3 billion; (iv) the position limits for all months
was 6,500 wheat contracts and the total value of contracts if
position limits were reached would be approximately $260.4 million
(based on the $40,062.50 contract price); (v) soybean futures volume
on CBOT for 2010 and 2011 (through April 29, 2011) was 36,962,868
contracts and 16,197,385 contracts, respectively; (vi) as of April
29, 2011, open interest for soybean futures was 572,959 contracts;
(vii) the soybean contract price was $69,700.00 (1394 cents per
bushel and 5,000 bushels per contract), and the approximate value of
all outstanding contracts was $39.9 billion; (viii) the position
limits for all months is 6,500 soybean contracts and the total value
of contracts if position limits were reached would be approximately
$453 million (based on the $69,700.00 contract price); (ix) sugar
futures volume on ICE Futures for 2010 and 2011 (through April 29,
2011) was 27,848,391 contracts and 9,045,069 contracts,
respectively; (x) as of April 29, 2011, open interest for sugar
futures was 570,948 contracts; (xi) the sugar contract price was
$24,920.00 (22.25 cents per pound and 112,000 pounds per contract),
and the approximate value of all outstanding contracts was $14.2
billion; and (xii) the position limits for all months is 15,000
sugar contracts and the total value of contracts if position limits
were reached would be approximately $373.8 million (based on the
$24,920.00 contract price), Securities Exchange Act Release No.
64967 (July 26, 2011), 76 FR 45885, 45886 n.10, 45888 n.20, 45890
n.24 (Aug. 1, 2011)); Securities Exchange Act Release No. 66553
(Mar. 9, 2012), 77 FR 15440 (Mar. 15, 2012) (SR-NYSEArca-2012-04)
(notice of proposed rule change included NYSE Arca's representations
that: (i) As of December 30, 2011, open interest in AUD/USD futures
contracts traded on CME was $11.56 billion, and AUD/USD futures
contracts had an average daily trading volume in 2011 of 123,006
contracts; (ii) as of December 30, 2011, open interest in CAD/USD
futures contracts traded on CME was $11.66 billion, and CAD/USD
futures contracts had an average daily trading volume in 2011 of
89,667 contracts; (iii) as of December 30, 2011, open interest in
CHF/USD futures contracts traded on CME was $4.99 billion, and CHF/
USD futures contracts had an average daily trading volume in 2011 of
40,955 contracts; (iv) futures contracts based on the U.S. Dollar
Index (``USDX'') were listed on November 20, 1985, and options on
the USDX futures contracts began trading on September 3, 1986; (v)
as of December 30, 2011, open interest in USDX futures contracts
traded on ICE Futures was $5.44 billion, and USDX futures contracts
had an average daily trading volume in 2011 of 30,341 contracts;
(vi) as of December 30, 2011, open interest in EUR/USD futures
contracts traded on CME was $46.12 billion, and EUR/USD futures
contracts had an average daily trading volume in 2011 of 336,947
contracts; and (vii) as of December 30, 2011, open interest in JPY/
USD futures contracts traded on CME was $25.75 billion, and JPY/USD
futures contracts had an average daily trading volume in 2011 of
113,476 contracts, Securities Exchange Act Release No. 66180 (Jan.
18, 2012), 77 FR 3532, 3534-35 (Jan. 24, 2012)); Securities Exchange
Act Release No. 68165 (Nov. 6, 2012), 77 FR 67707 (Nov. 13, 2012)
(SR-NYSEArca-2012-102) (notice of proposed rule change included NYSE
Arca's representations that: (i) Gold and silver futures contracts
traded on Commodity Exchange, Inc. (``COMEX'') are the global
benchmark contracts and most liquid futures contracts in the world
for each respective commodity; (ii) as of March 15, 2012, open
interest in gold futures contracts and silver futures contracts
traded on CME was $23.7 billion and $8.5 billion, respectively;
(iii) gold futures contracts and silver futures contracts had an
average daily trading volume in 2011 of 138,964 contracts and 63,913
contracts, respectively; (iv) CME constitutes the largest regulated
foreign exchange marketplace in the world, with over $100 billion in
daily liquidity; (v) as of March 15, 2012, open interest in Euro
futures contracts and Yen futures contracts traded on CME and, for
Dollar futures contracts, on ICE Futures, were $42.7 billion, $20.8
billion, and $4.8 billion, respectively; and (vi) Euro futures
contracts, Yen futures contracts, and Dollar futures contracts had
an average daily trading volume in 2011 of 325,103, 106,824, and
27,258 contracts, respectively, Securities Exchange Act Release No.
67882 (Sept. 18, 2012), 77 FR 58881, 58883 n.10, 58883 n.14 (Sept.
24, 2012)); Securities Exchange Act Release No. 81686 (Sept. 22,
2017), 82 FR 45643, 45646 (Sept. 29, 2017) (SR-NYSEArca-2017-05)
(order approving the listing and trading of the Direxion Daily Crude
Oil Bull 3x Shares and Direxion Daily Crude Oil Bear 3x Shares,
citing to NYSE Arca's representations that: (i) The oil contract
market was of significant size and liquidity, and had average daily
volume of 650,000 contracts and daily open interest of 450,000
contracts; (ii) the Sponsor is registered as a commodity pool
operator with the CFTC and is a member of the National Futures
Association, and (iii) the CFTC has regulatory jurisdiction over the
trading of futures contracts traded on U.S. markets); Securities
Exchange Act Release No. 82390 (Dec. 22, 2017), 82 FR 61625 (Dec.
28, 2017) (SR-NYSEArca-2017-107) (notice of proposed rule change
included NYSE Arca's representations that: (i) Freight futures
liquidity has remained relatively constant, in lot terms, over the
last five years with approximately 1.1 million lots trading
annually; (ii) open interest currently stood at approximately
290,000 lots across all asset classes representing an estimated
value of more than $3 billion, and, of such open interest, Capesize
contracts accounted for approximately 50%, Panamax for approximately
40%, and Handymax for approximately 10%, Securities Exchange Act
Release No. 81681 (Sept. 22, 2017), 82 FR 45342, 45345 (Sept. 28,
2017)). See also Securities Exchange Act Release No. 53582 (Mar. 31,
2006), 71 FR 17510 (Apr. 6, 2006) (SR-Amex-2005-127) (notice of
proposed rule change included Amex's representations that: (i) WTI
light, sweet crude oil contract, listed and traded at NYMEX, trades
in units of 42,000 gallons (1,000 barrels), and annual daily
contract volume on NYMEX from 2001 through October 2005 was 149,028,
182,718, 181,748, 212,382 and 242,262, respectively; (ii) annual
daily contract volume on ICE Futures for Brent crude contracts from
2001 through October 2005 was 74,011, 86,499, 96,767, 102,361 and
120,695 respectively; (iii) annual daily contract volume on NYMEX
for heating oil futures from 2001 through October 2005 was 41,710,
42,781, 46,327, 51,745 and 52,334, respectively; (iv) annual daily
contract volume on NYMEX for natural gas contracts from 2001 through
October 2005 was 47,457, 97,431, 76,148, 70,048 and 77,149,
respectively; and (v) annual daily contract volume on NYMEX for
gasoline contracts from 2001 through October 2005 was 38,033,
43,919, 44,688, 51,315 and 53,577, respectively, Securities Exchange
Act Release No. 53324 (Feb. 16, 2006), 71 FR 9614, 9618 (Feb. 24,
2006)); Securities Exchange Act Release No. 55632 (Apr. 13, 2007),
72 FR 19987 (Apr. 20, 2007) (SR-Amex-2006-112) (notice of proposed
rule change included Amex's representations that annual daily
contract volume on NYMEX for natural gas contracts from 2001 through
October 2006 was 47,457, 97,431, 76,148, 70,048, 76,265, and
102,097, respectively, Securities Exchange Act Release No. 55372
(Feb. 28, 2007), 72 FR 10267, 10268 (Mar. 7, 2007)).
\35\ For example, corn futures began trading in 1877, see
https://www.cmegroup.com/media-room/historical-first-trade-dates.html, and the first ETP based on corn futures was approved for
listing and trading in 2010. See Securities Exchange Act Release No.
62213 (June 3, 2010), 75 FR 32828 (June 9, 2010) (SR-NYSEArca-2010-
22). VIX futures began trading in 2004, see https://cfe.cboe.com/cfe-products/vx-cboe-volatility-index-vix-futures/contract-specifications, and the first ETPs based on VIX futures were
approved for listing and trading in 2010. See Securities Exchange
Act Release No. 63610 (Dec. 27, 2010), 76 FR 199 (Jan. 3, 2011) (SR-
NYSEArca-2010-10). Natural gas futures began trading in 1990, see
https://www.cmegroup.com/media-room/historical-first-trade-dates.html, and the first ETP based on natural gas was approved for
listing and trading in 2007. See Securities Exchange Act Release No.
55632 (Apr. 13, 2007), 72 FR 19987 (Apr. 20, 2007) (SR-Amex-2006-
112). Crude oil futures began trading in 1983, see https://www.cmegroup.com/media-room/historical-first-trade-dates.html, and
the first ETP based on crude oil futures was approved for listing
and trading in 2006. See Securities Exchange Act Release No. 53582
(Mar. 31, 2006), 71 FR 17510 (Apr. 6, 2006) (SR-Amex-2005-127).
Wheat futures, sugar futures, and soybean futures began trading in
1877, 1914, and 1936, respectively, see https://www.cmegroup.com/media-room/historical-first-trade-dates.html and https://www.theice.com/publicdocs/ICE_Sugar_Brochure.pdf, and the first ETPs
based on each of these commodity futures were approved for listing
and trading in 2011. See Securities Exchange Act Release No. 65344
(Sept. 15, 2011), 76 FR 58549 (Sept. 21, 2011) (SR-NYSEArca-2011-
48). U.S. Dollar Index futures began trading in 1985, https://www.theice.com/publicdocs/futures_us/ICE_Dollar_Index_FAQ.pdf, and
the first ETPs based on U.S. Dollar Index futures was approved for
listing and trading in 2007. See Securities Exchange Act Release No.
55292 (Feb. 14, 2007), 72 FR 8406 (Feb. 26, 2007) (SR-Amex-2006-86).
Australian Dollar futures and Euro futures began trading in 1987 and
1999, respectively, and Canadian Dollar futures, Swiss Franc
futures, and Yen futures began trading in 2002, see https://www.cmegroup.com/media-room/historical-first-trade-dates.html, and
the first ETPs based on each of these individual currency futures
were approved for listing and trading in 2012. See Securities
Exchange Act Release No. 66553 (Mar. 9, 2012), 77 FR 15440 (Mar. 15,
2012) (SR-NYSEArca-2012-04). Silver futures and gold futures began
trading in 1933 and 1974, respectively, see https://www.cmegroup.com/media-room/historical-first-trade-dates.html, and
the first ETPs based on each of these commodity futures were
approved for listing and trading in 2006. See Securities Exchange
Act Release No. 55029 (Dec. 29, 2006), 72 FR 806 (Jan. 8, 2007) (SR-
Amex-2006-76). Freight futures have been cleared since 2005, and the
first ETP based on freight futures was approved for listing and
trading in 2017. See Securities Exchange Act Release No. 82390 (Dec.
22, 2017), 82 FR 61625, 61626 n.6 (Dec. 28, 2017) (SR-NYSEArca-2017-
107) (noting that ``Freight Futures have been cleared since 2005'').
\36\ The Exchange filed its proposal before bitcoin futures
began trading on either CME or CFE.
\37\ At issue were futures on an index comprising futures on
crude oil, Brent crude oil, natural gas, heating oil, gasoline, gas
oil, live cattle, wheat, aluminum, corn, copper, soybeans, lean
hogs, gold, sugar, cotton, red wheat, coffee, standard lead, feeder
cattle, zinc, primary nickel, cocoa, and silver. See Securities
Exchange Act Release No. 53659 (Apr. 17, 2006), 71 FR 21074, 21080
(Apr. 24, 2006) (SR-NYSE-2006-17) (notice of proposed rule change to
list shares of iShares GSCI Commodity-Indexed Trust). The Commission
concluded that requirements of Exchange Act Section 6(b)(5) had been
met because concerns about manipulation would be addressed by the
arbitrage relationship between the new index futures and the
existing component futures, as well as the ETP listing exchange's
comprehensive surveillance-sharing agreements not only with the
market for the index futures, but also with the markets for the
component futures. See Securities Exchange Act Release No. 54013
(June 16, 2006), 71 FR 36372, 36379 (June 26, 2006) (SR-NYSE-2006-
17) (order approving listing of shares of iShares GSCI Commodity-
Indexed Trust). Additionally, the approval order for the ETP noted
that, if the volume in any futures contract that was part of the
reference index fell below a specified multiple of production of the
underlying commodity, that contract's weight in the index would
decrease. See id. at 36374.
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Accordingly, the Commission examines below whether the
[[Page 43939]]
representations by the Exchange, and the comments received from the
public, support a finding that the Exchange has entered into a
surveillance-sharing agreement with a market of significant size
relating to bitcoin, the asset underlying the proposed ETPs, or that
alternative means of preventing fraud and manipulation would be
sufficient to satisfy the requirement of Exchange Act Section 6(b)(5)
that the proposed rule change be designed to prevent fraudulent and
manipulative acts and practices.
2. Comments Received
One commenter states that commencing an ETP without allowing the
market to adjust to the cash-settled futures products would be akin to
``putting the cart before the horse'' and seems to be an attempt to
appease institutional investors.\38\
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\38\ See Desai Letter, supra note 9, at 1.
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One commenter states that the market for bitcoin derivatives other
than bitcoin exchange-traded futures appears to be developing and that
financial institutions are reportedly moving toward launching bitcoin-
related trading desks and other operations. This commenter believes
that the proposed offering of both long and short ETPs raises the
possibility that market makers in bitcoin-related derivatives could
make two-sided markets if interest in the long and short ETPs is
similar in magnitude. The commenter further believes that interest
outside of the bitcoin ETPs may be sufficient to motivate market makers
to maintain bitcoin derivatives desks.\39\ In addition, the commenter
suggests that questions about bitcoin derivatives markets can be
addressed through market depth analyses, discussions with potential
bitcoin derivatives liquidity providers, and analyses of order and
trade data across CME and CFE to determine the plausibility of
simultaneous liquidity collapses on both bitcoin future markets.\40\
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\39\ See NERA Letter, supra note 9, at 2.
\40\ See id. at 2.
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Three commenters assert that there is manipulation in the bitcoin
market.\41\ One commenter states that it is common knowledge that the
bitcoin market is being manipulated and asserts that BitConnect, which
was recently shut down and had promised risk-free annual returns of up
to 120%, is an example of Ponzi and multi-level marketing schemes that
are too common. This commenter argues that the Commission should not
send the wrong signal to bitcoin manipulators--who, the commenter
asserts, currently operate with impunity--by approving a bitcoin
ETP.\42\ Another commenter believes that the volatility of bitcoin
trading does not appear to be the result of natural trading and in the
long run would prevent true price discovery.\43\
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\41\ See Desai Letter, supra note 9, at 1; Fitzgerald Letter,
supra note 9, at 1; Kumar Letter, supra note 9.
\42\ See Kumar Letter, supra note 9.
\43\ See Malkin Letter, supra note 9, at 1-2.
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One commenter asserts that, in an unregulated market, a small
minority can manipulate the price of bitcoin and other ``altcoins'' and
that bitcoin and other cryptocurrencies are freely manipulated by
players who hold a disproportionate amount of cryptocurrencies or
access to fiat currencies. This commenter cites data showing that 4.11%
of bitcoin addresses own 96.53% of all the bitcoin in circulation, that
the top four addresses control 3.13% of all bitcoin currently in
distribution (worth over $4 billion), and that 115 individuals control
bitcoin worth over $24 billion.\44\ In contrast, another commenter
states that, although a small number of wallets may own 90% of
available bitcoin, exchanges own some of these wallets and may hold
bitcoin on behalf of hundreds, thousands, or millions of people.\45\
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\44\ See Fitzgerald Letter, supra note 9, at 1-2.
\45\ See Rousseau Letter, supra note 9.
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One commenter asserts that widespread pump-and-dump schemes
organized through the messaging platform ``Telegram'' are evidence of
manipulation.\46\ This commenter further cites an inquiry by then-New
York Attorney General Eric Schneiderman into cryptocurrency exchanges
and the use of trading ``bots'' on those exchanges to manipulate the
market, and asserts that such activity can drive prices above fair
market value by over 300%. The commenter notes the Kraken exchange's
refusal to cooperate with this inquiry and believes that this refusal
should pose serious questions for investors and the Commission about
the Kraken exchange's operations, particularly after the Kraken
exchange recently exited the Japanese market due to regulatory
requirements.\47\
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\46\ See Fitzgerald Letter, supra note 9, at 2.
\47\ See id. at 2.
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One commenter states that a commonly cited factor mitigating
possible susceptibility to manipulation is the securities exchanges'
own surveillance procedures, in addition to the futures exchanges'
surveillance procedures and market surveillance and oversight by the
Commodity Futures Trading Commission (``CFTC''). This commenter cites
statements by the CFTC that it has the legal authority and means to
police certain spot markets for fraud and manipulation through
``heightened review'' collaboration with exchanges, that exchanges will
provide the CFTC surveillance team with trade settlement data upon
request, and that the exchanges will enter into information-sharing
agreements with spot market platforms and monitor trading activity on
the spot markets. The commenter also states that the Gemini exchange
has announced that it would use Nasdaq's market surveillance system to
monitor its marketplace.\48\
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\48\ See NERA Letter, supra note 9, at 4-5.
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This commenter further asserts that market surveillance is
generally a prerequisite to identifying potential market manipulation
and discourages market manipulation. The commenter believes that the
emergence of institutionalized market surveillance on both futures and
spot markets is a positive sign for the long-term future of bitcoin
markets.\49\ The commenter suggests that the Commission, in
coordination with the CFTC, self-regulatory organizations, bitcoin
futures exchanges, and bitcoin spot market platforms, could gather
market surveillance data to conduct an independent analysis of trade
and settlement patterns and determine whether potentially manipulative
trading practices occur on bitcoin spot and futures markets.\50\
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\49\ See id. at 5.
\50\ See id.
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3. Analysis
Unlike previous proposals for bitcoin-based ETPs,\51\ the Exchange
does not assert here that bitcoin prices or markets are inherently
resistant to manipulation. A number of commenters, however, have noted
the potential for manipulation in bitcoin markets.\52\ Instead, the
Exchange asserts that its existing surveillance procedures (including
its ability to review activity by its members) and its ability to share
surveillance information with U.S. futures exchanges are sufficient to
meet the requirements of Exchange Act
[[Page 43940]]
Section 6(b)(5).\53\ One commenter also asserts that the exchange's own
surveillance procedures, along with market surveillance and oversight
by the CFTC, can mitigate manipulation.\54\
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\51\ See Winklevoss Order, supra note 28, 83 FR at 37582 (noting
exchange argument that ``intrinsic properties of bitcoin and bitcoin
markets make manipulation `difficult and prohibitively costly' '');
Order Disapproving Proposed Rule Change, as Modified by Amendment
No. 1, Relating to the Listing and Trading of Shares of the SolidX
Bitcoin Trust, Securities Exchange Act Release No. 80319 (Mar. 28,
2017), 82 FR 16247, 16251 (Apr. 3, 2017) (SR-NYSEArca-2016-101)
(noting that study commissioned by trust sponsor argues that ``the
underlying market for bitcoin is inherently resistant to
manipulation'').
\52\ See supra notes 41-47 and accompanying text.
\53\ See Notice, supra note 3, 82 FR at 61105.
\54\ See supra notes 48-49 and accompanying text. This commenter
also suggests that the Commission--in coordination with the CFTC,
SROs, futures markets, and bitcoin spot platforms--could gather
market surveillance data to independently analyze whether
manipulative practices occur on bitcoin spot and futures platforms.
See supra note 50 and accompanying text. As noted above, however, it
is the Exchange that bears the burden to demonstrate that its
proposal is designed to ``prevent fraudulent and manipulative acts
and practices.'' See supra notes 23-26 and accompanying text.
---------------------------------------------------------------------------
While the Exchange would, pursuant to its listing rules, be able to
obtain certain information regarding trading in the Shares and in the
underlying bitcoin or any bitcoin derivative through registered market
makers,\55\ this trade information would be limited to the activities
of market participants who trade on the Exchange. Furthermore, neither
the Exchange's ability to surveil trading in the Shares nor its ability
to share surveillance information with other securities exchanges
trading the Shares would give the Exchange insight into the activity
and identity of market participants who trade in bitcoin futures
contracts or other bitcoin derivatives or who trade in the underlying
bitcoin spot markets, where a substantial majority of trading, the
Commission concluded in the Winklevoss Order, ``occurs on unregulated
venues overseas that are relatively new and that, generally, appear to
trade only digital assets.'' \56\ Thus, consistent with its
determination in the Winklevoss Order,\57\ and with the Commission's
previous orders approving commodity-futures ETPs,\58\ the Commission
believes that the Exchange must demonstrate that it has in place a
surveillance-sharing agreement with a regulated market of significant
size related to bitcoin, because ``[s]uch agreements provide a
necessary deterrent to manipulation because they facilitate the
availability of information needed to fully investigate a manipulation
if it were to occur.'' \59\
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\55\ See Notice, supra note 3, at 82 FR 61105 (``The Exchange is
also able to obtain information regarding trading in the Shares, the
commodity underlying futures or options on futures through ETP
[Exchange Trading Permit] Holders, in connection with such ETP
Holders' proprietary or customer trades which they effect through
ETP Holders on any relevant market.'').
\56\ Winklevoss Order, supra note 28, 83 FR at 37580.
\57\ See id. at 37591 (finding that ``traditional means'' of
surveillance were not sufficient in the absence of a surveillance-
sharing agreement with a regulated market of significant size
related to the underlying asset).
\58\ See supra note 33 and accompanying text (noting previous
commodity-futures ETPs where surveillance sharing in place between
ETP listing exchange and underlying futures exchanges).
\59\ Winklevoss Order, supra note 28, 83 FR at 37580 (quoting
Amendment to Rule Filing Requirements for Self-Regulatory
Organizations Regarding New Derivative Securities Products,
Securities Exchange Act Release No. 40761 (Dec. 8, 1998), 63 FR
70952, 70954, 70959 (Dec. 22, 1998) (File No. S7-13-98)).
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The Exchange represents that it is able to share surveillance
information with CME and CFE, which are bitcoin futures markets
regulated by the CFTC, through membership in the Intermarket
Surveillance Group.\60\ Nonetheless, the Commission must disapprove the
proposal, because there is no evidence in the record demonstrating that
CME's and CFE's bitcoin futures markets are markets of significant
size.
---------------------------------------------------------------------------
\60\ See https://www.isgportal.org/isgPortal/public/members.htm
(listing the current members and affiliate members of the
Intermarket Surveillance Group).
---------------------------------------------------------------------------
The Order Instituting Proceedings sought comment on whether the CME
and CFE bitcoin futures markets are markets of significant size,\61\
but the Exchange has not responded to any of the questions in the Order
Instituting Proceedings, and the only analysis of the underlying
futures markets the Exchange has provided in its proposed rule change
are the generic statements that the market for bitcoin futures
contracts ``has very limited trading and operational history'' and that
the liquidity of these markets will depend on supply and demand, the
adoption of bitcoin, and interest in the market for these futures.\62\
Thus, there is no basis in the record on which the Commission can
conclude that the bitcoin futures markets are markets of significant
size. Publicly available data show that the median daily notional
trading volume, from inception through August 10, 2018, has been 14,185
bitcoins on CME and 5,184 bitcoins on CFE, and that the median daily
notional value of open interest on CME and CFE during the same period
has been 10,145 bitcoins and 5,601 bitcoins, respectively.\63\ But
while these futures contract figures are readily available, meaningful
analysis of the size of the CME or CFE markets relative to the
underlying bitcoin spot market is challenging, because reliable data
about the spot market, including its overall size, are unavailable.\64\
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\61\ See Order Instituting Proceedings, supra note 7, 83 FR at
13539.
\62\ Notice, supra note 3, 82 FR at 61103; see also supra note
19 and accompanying text.
\63\ These volume figures were calculated by Commission staff
using data published by CME and CFE on their websites.
\64\ See Winklevoss Order, supra note 28, 83 FR at 37601.
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The Commission also notes that in recent testimony CFTC Chairman
Giancarlo characterized the volume of the bitcoin futures markets as
``quite small.'' \65\ Additionally, the President and COO of CFE,
recently acknowledged in a letter to the Commission staff that ``the
current bitcoin futures trading volumes on Cboe Futures Exchange and
CME may not currently be sufficient to support ETPs seeking 100% long
or short exposure to bitcoin.'' \66\ These statements reinforce the
Commission's conclusion that there is insufficient evidence to
determine that the CME and CFE bitcoin futures markets are markets of
significant size.
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\65\ CFTC Chairman Giancarlo testified: ``It is important to put
the new Bitcoin futures market in perspective. It is quite small
with open interest at the CME of 6,695 bitcoin and at Cboe Futures
Exchange (Cboe) of 5,569 bitcoin (as of Feb. 2, 2018). At a price of
approximately $7,700 per Bitcoin, this represents a notional amount
of about $94 million. In comparison, the notional amount of the open
interest in CME's WTI crude oil futures was more than one thousand
times greater, about $170 billion (2,600,000 contracts) as of Feb[.]
2, 2018 and the notional amount represented by the open interest of
Comex gold futures was about $74 billion (549,000 contracts).'' See
Written Testimony of J. Christopher Giancarlo, Chairman, Commodity
Futures Trading Commission, Before the Senate Banking Committee at
text accompanying nn. 14-15 (Feb. 6, 2018). See also Winklevoss
Order, supra note 28, 83 FR at 37601 (citing Giancarlo testimony).
\66\ Letter from Chris Concannon, President and COO, Cboe Global
Markets, to Dalia Blass, Director, Division of Investment
Management, Commission, at 5 (Mar. 23, 2018), available at https://www.sec.gov/divisions/investment/cboe-global-markets-innovation-cryptocurrency.pdf.
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Furthermore, while the Exchange represents that no more than 10% of
the net assets of a Fund in the aggregate invested in bitcoin futures
contracts will be invested in contracts whose principal market is
neither a member of the Intermarket Surveillance Group nor a market
with whom the Exchange has a comprehensive surveillance-sharing
agreement,\67\ this does not function as a meaningful limitation where,
as here, there is no minimum amount of a Fund that must be invested in
such contracts. According to the Notice, in the event position, price,
or accountability limits are reached with respect to bitcoin futures
contracts, each Fund may invest in listed options on bitcoin futures
contracts (should such listed options become available) and OTC swap
agreements referencing bitcoin futures contracts.\68\ The Notice does
not establish any limit on the Funds' holdings of these other bitcoin-
related derivatives; it provides no analysis of the size and liquidity
of markets for those derivatives; and it does not discuss whether the
Exchange has the ability to share surveillance information
[[Page 43941]]
with the markets for these derivatives. Thus, as to what might be a
substantial proportion of the Funds' portfolios, the Commission is
unable to conclude that surveillance-sharing will be available, that
the related markets are regulated, or that the related markets are of
significant size.
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\67\ See supra note 17 and accompanying text.
\68\ See Notice, supra note 3, 83 FR at 61102; see also supra
note 18 and accompanying text.
---------------------------------------------------------------------------
While one commenter suggests that the market for bitcoin
derivatives other than exchange-traded futures appears to be
developing--and that the offering of long and short bitcoin ETPs
``raises the possibility that market makers in Bitcoin derivatives
could make two-sided markets if interest in both the long and short
ETFs is similar in magnitude'' \69\--these speculative statements do
not provide a basis for the Commission to conclude that the non-
exchange-traded bitcoin derivatives market is now, or may eventually
be, of significant size.
---------------------------------------------------------------------------
\69\ See supra notes 39-40 and accompanying text.
---------------------------------------------------------------------------
The Commission therefore concludes that Exchange has not
demonstrated that it has entered into a surveillance-sharing agreement
with a regulated market of significant size related to bitcoin, or
that, given the current absence of such an agreement, the exchange's
own surveillance procedures described above would, by themselves, be
sufficient to satisfy the requirement of Exchange Act Section 6(b)(5)
that an exchange's rules be designed to prevent fraudulent and
manipulative acts and practices.\70\ While CME and CFE are regulated
markets for bitcoin derivatives, there is no basis in the record for
the Commission to conclude that these markets are of significant size.
Additionally, because bitcoin futures have been trading on CME and CFE
only since December 2017, the Commission has no basis on which to
predict how these markets may grow or develop over time, or whether or
when they may reach significant size.
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\70\ See 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
Although the Exchange has not demonstrated that a regulated bitcoin
futures market of significant size currently exists, the Commission is
not suggesting that the development of such a market would
automatically require approval of a proposed rule change seeking to
list and trade shares of an ETP holding bitcoins as an asset. The
Commission would need to analyze the facts and circumstances of any
particular proposal and examine whether any unique features of a
bitcoin futures market would warrant further analysis before approval.
C. Protecting Investors and the Public Interest
1. Comments Received
One commenter states that approval of a bitcoin ETP on a U.S.-
regulated exchange would protect small traders and increase exposure to
a new asset class in a safe manner.\71\ Another commenter states that
if the Commission rejects bitcoin ETPs, it will push investors to
unregulated and possibly unsafe environments.\72\
---------------------------------------------------------------------------
\71\ See Mohammed Letter, supra note 9.
\72\ See Fink Letter, supra note 9.
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One commenter believes that, while the Commission should deny the
proposed ETPs, it should regulate this environment to stop individual
consumers from coming to financial harm.\73\
---------------------------------------------------------------------------
\73\ See Fitzgerald Letter, supra note 9, at 2.
---------------------------------------------------------------------------
One commenter suggests that the Commission could address some of
its concerns about the proposed ETPs by working with self-regulatory
organizations, and in particular FINRA, to create bitcoin and
cryptocurrency-related asset suitability requirements. In addition,
this commenter suggests that targeted disclosure requirements could
make investors aware of volatility, discourage retail investors from
investing more than a small portion of their portfolio in
cryptocurrency-related assets, and present historical scenarios to
retail investors to demonstrate how an instrument such as a particular
bitcoin ETP would have performed over time. This commenter believes
that suitability requirements are less prescriptive than an effective
ban on a class of product and that they could balance the Commission's
interest in protecting retail investors against its interest in
allowing cryptocurrency-related asset markets to continue to develop in
regulated markets where the Commission can observe their performance
closely.\74\
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\74\ See NERA Letter, supra note 9, at 5-6.
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Several commenters assert that the Commission should deny the
proposed ETPs to help protect the public from exposure to financial
risk from an unregulated market.\75\ One commenter asserts that, while
the risk posed by the cash-settled futures products is mostly
contained, a bitcoin ETP would expose the public to significant
financial risk due to a highly volatile, unregulated, and manipulated
market in bitcoin as well as cryptocurrencies in general.\76\ Several
commenters further believe that before the Commission approves a
bitcoin ETP, there should be a proper legal and regulatory framework
put in place by a suitable governmental body to prevent manipulation
and protect the public.\77\ Another commenter refers to the proposed
ETPs as a ``house of cards'' and expresses concern that the Funds'
attempt to replicate the bitcoin futures markets, which are related to
underlying cryptocurrencies that trade on unregulated exchanges, will
lead to losses for retail investors, and that the inclusion of an
inverse Fund will add to the risk.\78\
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\75\ See Desai Letter, supra note 9, at 1; Kohen Letter, supra
note 9; Kumar Letter, supra note 9; Malkin Letter, supra note 9, at
2.
\76\ See Desai Letter, supra note 9, at 1.
\77\ See Desai Letter, supra note 9, at 1, 2; Kumar Letter,
supra note 9; Malkin Letter, supra note 9, at 2.
\78\ See Kohen Letter, supra note 9.
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2. Analysis
The Exchange asserts that approval of the proposal would enhance
competition among market participants, to the benefit of investors,\79\
and two commenters assert that approval would protect investors by
permitting them to seek exposure to bitcoin through a safer, regulated
market.\80\ Other commenters suggest that the Commission should either
seek to regulate the underlying bitcoin markets,\81\ or should seek to
protect investors through disclosure requirements or suitability
standards, rather than disapproving a bitcoin-ETP proposal.\82\ Several
other commenters, however, assert that approval of a bitcoin-based ETP
would expose investors to risks from unregulated bitcoin markets.\83\
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\79\ See Notice, supra note 3, 82 FR at 61106.
\80\ See supra notes 71-72 and accompanying text.
\81\ See supra note 73 and accompanying text.
\82\ See supra note 74 and accompanying text.
\83\ See supra notes 75-78 and accompanying text.
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The Commission acknowledges that, compared to trading in
unregulated bitcoin spot markets, trading a bitcoin-based ETP on a
national securities exchange may provide some additional protection to
investors, but the Commission must consider this potential benefit in
the broader context of whether the proposal meets each of the
applicable requirements of the Exchange Act. Pursuant to Section
19(b)(2) of the Exchange Act, the Commission must disapprove a proposed
rule change filed by a national securities exchange if it does not find
that the proposed rule change is consistent with the applicable
requirements of the Exchange Act--including the requirement under
Section 6(b)(5) that the rules of a national securities exchange be
designed to prevent fraudulent and manipulative acts and practices.
Thus, even if a proposed rule change would provide certain benefits
to
[[Page 43942]]
investors and the markets, the proposed rule change may still fail to
meet other requirements under the Exchange Act. For the reasons
discussed above, the Exchange has not met its burden of demonstrating
an adequate basis in the record for the Commission to find that the
proposal is consistent with Exchange Act Section 6(b)(5), and,
accordingly, the Commission must disapprove the proposal.y
D. Other Comments
Comment letters also addressed the intrinsic value of bitcoin; \84\
the desire of investors to gain access to bitcoin through an ETP; \85\
investor understanding about bitcoin; \86\ the volatility of bitcoin
prices,\87\ the regulation of bitcoin spot markets,\88\ the operation
and valuation of the proposed ETPs,\89\ the potential impact of
Commission approval of the proposed ETP on the price of bitcoin,\90\
and the legitimacy that Commission approval of the proposed ETP might
confer upon bitcoin as a digital asset.\91\ Ultimately, however,
additional discussion of these tangential topics is unnecessary, as
they do not bear on the basis for the Commission's decision to
disapprove the proposal.
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\84\ See Ahn Letter, supra note 9.
\85\ See Fink Letter, supra note 9; Kaleda Letter, supra note 9;
Moberg Letter, supra note 9; Rousseau Letter, supra note 9; Santos
Letter, supra note 9.
\86\ See Desai Letter, supra note 9, at 1; Kumar Letter, supra
note 9.
\87\ See Desai Letter, supra note 9, at 1; Malkin Letter, supra
note 9, at 1.
\88\ See Desai Letter, supra note 9, at 1; Fitzgerald Letter,
supra note 9, at 1; Kumar Letter, supra note 9; Malkin Letter, supra
note 9, at 1; Mohammed Letter, supra note 9.
\89\ See Desai Letter, supra note 9, at 1; Malkin Letter, supra
note 9, at 1; Kumar Letter, supra note 9; NERA Letter, supra note 9,
at 1-2, 3, 5.
\90\ See Santos Letter, supra note 9.
\91\ See Desai Letter, supra note 9, at 1, 2; Kumar Letter,
supra note 9; Santos Letter, supra note 9.
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E. Basis for Disapproval
The record before the Commission does not provide a basis for the
Commission to conclude that the Exchange has met its burden under the
Exchange Act and the Commission's Rules of Practice to demonstrate that
its proposed rule change is consistent with Exchange Act Section
6(b)(5).\92\
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\92\ In disapproving the proposed rule change, the Commission
has considered its impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
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IV. Conclusion
For the reasons set forth above, the Commission does not find,
pursuant to Section 19(b)(2) of the Exchange Act, that the proposed
rule change is consistent with the requirements of the Exchange Act and
the rules and regulations thereunder applicable to a national
securities exchange, and in particular, with Section 6(b)(5) of the
Exchange Act.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Exchange Act, that proposed rule change SR-NYSEArca-2017-139 is
disapproved.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\93\
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\93\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-18572 Filed 8-27-18; 8:45 am]
BILLING CODE 8011-01-P
